Industry oversupply resurfaces to plague Transpacific & Asia-Europe freight rates yet again

13 November 2017, Global – Container shipping freight rates in the spot market have fallen markedly by 4% in the past week and are 5% lower y/y. This is mainly driven by industry oversupply, rather than the lack of trade demand. The head-haul demand growth from Asia to North America and Europe has actually accelerated recently to 10% and 7% y/y respectively. Global container shipping demand has been growing at 4.9% y/y ytd, in line with our forecast for the full year. Although demand growth has slowed to 4.1% y/y lately, it is still at a healthy expansionary pace and exceeds the 1.4% and 3.5% demand growth rates in 2015 and 2016 respectively.

Therefore, unless more capacity is being taken out, the liners’ planned rate hikes in mid-November and early December may meet with limited and short-lived success. Rising bunker fuel prices (which have risen 13% m/m and 30% y/y) will also put more pressure on profit margins if higher fuel surcharges are being offset by discounted underlying freight rates.

Asian container shipping stocks have historically had a negative correlation with the Transpacific and Asia-Europe freight rates, both of which have weakened. The global container shipping industry oversupply could worsen in 2018. Based on our forecasts, the global container shipping net capacity will grow 5.9% y/y in 2018, exceeding our projected demand growth of 4.7%, putting pressure on freight rates and profit margins next year. This could drive container shipping equities, particularly companies with large Transpacific and Asia-Europe trade exposure, lower.

Listed Asian carriers with the largest capacity exposure to the Transpacific container shipping trade are Kawasaki Kisen Kaisha 9107:JP (55% of total capacity, 1.2x P/B), Mitsui OSK 9104:JP (48%, 0.7x P/B) and Hyundai Merchant Marine 011200:KS (33%, 1.7x P/B).

Listed Asian liners with the largest capacity exposure to the Asia-Europe container shipping trade are Yang Ming Marine 2609:TT (39% of total capacity, 1.1x P/B), Nippon Yusen Kaisha 9101:JP (38%, 0.9x P/B) and Evergreen Marine 2603:TT (32%, 1.1x P/B).

SPOT FREIGHT RATE INDEX WEAKENED IN THE PAST WEEK AFTER THEIR BRIEF RECOVERY FOR 3 WEEKS

The spot freight rate index fell 4% w/w and 5% y/y during the week ending 10th November 2017. Notably, among all the major trade lanes, Transpacific container shipping spot market freight rates fell the most during the week, down 9% w/w and 25% y/y. On the Asia-Europe trade lane, Asia-Europe freight rates also fell 7% w/w and 16% y/y in the spot market.

Chart: Container shipping spot market freight rate index (2014 to 2017)

Chart: Container shipping spot market freight rate index (2014 to 2017)

Chart: Container shipping current spot freight rates growth/decline (10 Nov 2017)

Chart: Container shipping current spot freight rates growth/decline (10 Nov 2017)

 

WEAK SPOT MARKET FREIGHT RATES ARE DRIVEN BY SUPPLY, NOT DEMAND

The weaker freight rates are mainly driven by industry oversupply rather than a reflection of weak shipping demand. Therefore, unless global container shipping demand growth accelerates or more capacity is being taken out, the liners’ planned rate hikes in mid-November and early December may meet with limited and short-lived success. This trend is likely to continue into next year.

HEAD-HAUL CONTAINER SHIPPING VOLUME GROWTH FROM ASIA TO LONG-HAUL DESTINATIONS IS STRONGER THAN BEFORE

Transpacific container shipping volume growth from Asia to North America has actually accelerated, rising 10% y/y versus its 9% growth y/y ytd. Similarly, container shipping volume on the Asia-Europe trade lane grew 7% y/y, ahead of its 5% y/y growth ytd.

The growth in head-haul container shipping volume from Asia to South & Central America and Africa has also been very strong, rising 12% y/y and 8% y/y respectively.

The key area of weakness has been container shipping demand from Asia to the South West Pacific region where volume has fallen 21% y/y lately, worse than its 10% y/y decline ytd.

Chart: Asia head-haul container shipping volume growth/decline (2017)

Chart: Asia head-haul container shipping volume growth/decline (2017)

BACK-HAUL CONTAINER SHIPPING DEMAND FROM NORTH AMERICA AND EUROPE TO ASIA HAS HOWEVER WEAKENED

Asia’s back-haul trade from North America and Europe has, however, weakened considerably since the earlier part of this year. Container shipping volume from North America to Asia has fallen 7% y/y recently from stable volume y/y ytd while volume from Europe to Asia has fallen 1% y/y from its 6% growth y/y ytd.

The key areas of strong back-haul volume to Asia are from the Middle East, Africa and South & Central America.

Meanwhile, Intra-Asia container shipping volume growth has slowed from 4.3% y/y ytd to 3.5% currently which is disappointing.

Chart: Asia back-haul container shipping volume growth/decline (2017)

Chart: Asia back-haul container shipping volume growth/decline (2017)

NOTWITHSTANDING THE SOFTER FREIGHT RATE ENVIRONMENT, THE LINERS HAVE NOT REMOVED MUCH CAPACITY SO FAR

The level of idle containerships has fallen to 1.9% from 7.9% a year ago.

Chart: Global idle containerships as a % of total fleet capacity (2012 to 2017)

Chart: Global idle containerships as a % of total fleet capacity (2012 to 2017)

THE PACE OF VESSEL DELIVERIES IS SLOWING IN 4Q17 AS WE HAD ANTICIPATED BUT WILL RISE AGAIN FROM 2018 WHICH IS A CONCERN

As mentioned in our previous reports, we highlighted the oversupply risk as the pace of vessel deliveries are expected to pick up in 2H17 and they have. In 3Q17, 0.13m TEUs were delivered per month in the global container shipping sector. This was 52% higher than the average monthly capacity added in 1H 2017 and 78% higher y/y.

Newbuild vessel deliveries are expected to slow to 0.09m TEUs per month in 4Q17. However, they will accelerate again to 0.14m per month in 2018 which could result in industry oversupply and drive freight rates lower again.

Chart: Global containership capacity delivered (2014 to 2017)

Chart: Global containership capacity delivered (2014 to 2017)

 

INDUSTRY OVERSUPPLY COULD WORSEN NEXT YEAR UNLESS THE GLOBAL TRADE DEMAND GROWS MORE THAN 6% OR VESSEL SCRAPPING REMOVES MORE THAN 3% OF THE GLOBAL CONTAINERSHIP FLEET

Based on the existing orders, newbuild vessels are expected to add 1.6m TEUs to the global container shipping capacity next year. We forecast the global container shipping net capacity to grow 5.9% y/y in 2018, well ahead of our projected demand growth of 4.7%. 

In order to keep the global container shipping industry’s demand and supply growth balanced, at least one of the three bullish scenarios below needs to happen:

  • Global trade demand growth accelerates to 6.0% or higher
  • Vessel scrapping removes more than 3% of the global container shipping fleet capacity
  • Some of the newbuild vessel deliveries are deferred to 2019 

In 2019, we expect the industry’s net capacity growth to moderate to 4.0%, only slightly below our projected demand growth of 4.1%. Therefore, it is only in 2020 when the industry outlook becomes more favourable again as the global container shipping capacity is expected to remain flattish, at least for now, based on the current newbuild vessel orderbook.

Chart: Global container shipping demand and supply growth and idle fleet ratio versus freight rate growth (2007 to 2020)

Chart: Global container shipping demand and supply growth and idle fleet ratio versus freight rate growth (2007 to 2020)

 

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