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Supply Chain News: Better Times May Indeed be Here for Ocean Container Carriers, as Shippers should be Ready for Higher Rates


Capacity Discipline, Mergers, Rising Volumes Augur Well for Carriers, Not Shippers

Aug. 29, 2017
SCDigest Editorial Staff

It has certainly been tough times for ocean container carriers in recent years, as slowing growth in container volumes at the same time most carriers were adding huge amounts of capacity lead to rock bottom rates and lots of red ink.

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The volume news has been so positive so far in 2017 that Drewry says it has been forced into"a fairly radical reassessment" of its container volume forecasts for both this year and the next.

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But from a carrier perspective at least, those dark days may at last be gone. On the supply side, there has been a dramatic cut back in orders for new ships, helping to get supply better balanced with demand – though some industry observers wonder whether that discipline can hold. (See Container Carrier Capacity Discipline May Be Cracking, as CMA CGM On Brink of Order Largest Ships Ever.)

The tough times also unleased a wave of first alliances among various groups of carriers and then more recently a series of mergers and acquisitions, both of which will eventually have the effect of constraining capacity. The industry also saw the full bankruptcy of South Korea's Hanjin Shipping in mid-2016, which took more capacity out of the market.

Describing the dire state of the market at the time and the desperate lengths taken by the shipping lines to win trade, one shipbroker said: "They [the carriers] keep slitting each other's throats with lower prices."

Now add to all that the fact that container volumes are once again increasing. The chart below from the analysts at Drewry Shipping, shows year-over-year changes in worldwide container volumes dating back to 2010.

As can be seen, that rate of growth fell dramatically for most of the period, decreasing from about 15% coming out of the recession in early 2010 to barely positive in late 2015 into 2016. That fall occurred in parallel with a dramatic reduction in global trade growth compared to growth in world GDP in those years.


Source: Drewry

But as can also be seen, in the second half of 2016 and so far in 2017 the trend is back in the container carriers' favor, with year-over-year growth back so far this year of almost 7%.

What's going on? The world economy is holding its own, Drewry notes, with the International Monetary Fund recently modestly upping it forecasts for 2017 and 2018 world GDP growth – a change from the past few years when the forecasts were almost always revised downward, not up. And trade growth relative to also GDP seems to be rising.

Volumes so far into and out of US ports are especially strong. Through the first half of 2017, volumes for West Coast ports have been up 4.3%, and in East Coast ports a very robust 8.6%, both driven largely by rising imports.

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The volume news has been so positive so far in 2017 that Drewry says it has been forced into "a fairly radical reassessment" of its container volume forecasts for both this year and the next.

Combined for now with capacity discipline, container shipping rates have indeed started to rise.

"The saturation of the market is now turning into a more normal oversupply," said Andi Case, chief executive of shipbroker Clarkson, pointing to shipyards failing as a signal that the mass of new ships entering the market might just be ending.

In addition, many in the industry think consolidation is likely to continue as shipping lines seek to join forces to strip out costs and have better control of capacity.

Rates as measured by the China Containerized Freight Index are up some 30% from the bottom in 2016, and have been pretty stable over several months.

Will that trend hold, in good news for carriers and bad news for shippers? The odds look favorable, but as noted above there are some signs carriers may be tempted to get back to ordering more new large megaships.

Do you see container rates heading back up? Why or why not? Let us know your thoughts at the Feedback section below.


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