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- September 2, 2010 -

Global Logistics News: Despite Growing Recovery In Container Volumes, Ocean Shipping Capacity Still Growing Faster than Demand

New Report from Sea-Axis more Bearish for Carriers than Other Estimates; "Effectively Fleet" Capacity Growth to Far Exceed Demand Growth of 10% in 2010 and 2011
 
     
 


SCDigest Editorial Staff

SCDigest Says:
For the first time in history, monthly delivery of new ships to carriers exceeded 120,000 TEUs for 5 months in a row.

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The ocean shipping industry is recovering nicely along with growth in world GDP, fueled by the developing economies, but continued growth in shipping capacity above the increase in container traffic will once again push down ocean rates into 2011.

That's according to a new report by Sea-Axis, a major container leasing company and division of Axis Intermodal.

The report, which was released in late August, notes that the financial condition for major ocean carriers has improved substantially from the darkest days of 2009, with revenue for nine of the largest carriers in Q1 of this year up 7% over Q4 2009 and an amazing 70% versus the prior year.

That group still generated net losses in the period as a whole, but were 83% less than in Q4 09 and 94% less than at the same period last year.

Still, the carriers face financial challenges. According to Philippe Hoehlinger, VP of Risk Management at Sea-Axis and the report's author, the carrier's current operating margins are "adequate to cover their interest expenses but still not debt obligations as a whole yet."

Many carriers took on much debt to fuel expansion in the middle part of the decade before the recession began in 2008.

 

Supply-Demand Equation to Remain Favorable to Shippers

 

There has been a fairly strong recovery in worldwide containers volumes, up about 20% into the US in the first half of this year, and likely to be up about 10% in 2010 on a total global basis.

 

The report says that historically container volumes are 96% correlated to GDP growth, and world GDP is expected to grow 4.6% in 2010, according to the International Monetary Fund. (US growth is estimated at 2.4% for the year.) Sea-Axis estimates container volume growth of about 10% globally again in 2011.

 

The report notes those estimates are about the same as similar predictions from Clarksons Research and slightly higher than the estimates from Drewry Shipping Consultants, which estimates global container growth of 8/6% and 7.4% in 2010 and 2011, respectively.

 

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That strong demand growth, however, is likely to be overwhelmed by even faster growth in shipping capacity coming on line.

For the first time in history, monthly delivery [of new ships to carriers] exceeded 120,000 TEUs for 5 months in a row," Hoehlinger says. "The effects of [order] postponements are over and shipyards are catching up with deliveries."

Sea-Axis likes to look at a metric it calls "effective fleet," which it defines as capacity that is fully utilized and excludes idle fleet and any additional capacity allocated to "slow steaming."

Sea-Axis estimates that effective fleet capacity is expected to increase by 16% by the end of 2010 and another 13% by the end of 2011 - stronger growth than the approximate 10% increase in global demand. The good news for shippers and not for carriers is this means that the supply-demand balance will once again tip strongly in favor of shippers, though the report notes that the estimates for supply growth by Clarksons and Drewry are lower than the Sea-Axis numbers, both expecting 6.2% growth in fleet capacity in 2010 and 7.8% in 2011.

With demand growth at 10%, which numbers you use makes all the difference in your view of the supply-demand equation. As shown in the chart below, Drewry and Clarksons see that balance as somewhat positive or flat/neutral for carriers, while Sea-Axis predicts significant over supply, especially in the routes from Asia to the US and Europe.

 

Source: Sea-Axis

  

Hoehlinger  says rates will drop 10% in Q4 of this year and even more in early 2011, when the overcapacity situation is expected to peak. Later in the year, the supply-demand balance should improve in the carriers' favor, and prices should stabilize.

He also notes that while rates for charter shippers have recovered nicely, "It should however be noted that even if charter hire rates are increasing, they are 28% lower on average of what they should be to cover all the costs of purchasing, financing and operating" the ships.

How do you think the supply and demand equation for ocean shipping will play out through 2011? Will Sea-Axis be right, with substantial overcapacity, or will the other view prevail? Let us know your thoughts at the Feedback button below.

  
 
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