Container Shipping Cycles
This industry has many players, and all are price takers. Its a typical cyclical industry. A chart of charter rates for container ships:
The above chart is for a combination of vessel types. Current prices of for individual vessel types are here.
The usual cycle is that, when rates are high, everyone rushes to build ships. New supply ends up pushing rates down, starting a downturn. As it takes 1-3 years to build a vessel, new ships end up being added to an already depressed market. We are in that phase now:
- As of February 1, 2016, newbuilding containerships ... representing approximately 19.6% of the total worldwide containership fleet capacity ...were under construction. The size of the orderbook will result in the increase in the size of the world containership fleet over the next few years. (Seaspan 2015 Annual Report, p11)
There have been no orders in Q1:
- With regards to new contracting activity, no orders have been agreed in 2016. This is the first time since Q2-2009 that three months have passed without any orders signed. (Bimco)
Scrapping of vessels is required to bring the marked into balance, but it will take a long time:
- Demolition of excess capacity lies at the centre of the road to recovery, also for container shipping. Multiple years of negative fleet growth is needed to bring sustainable freight rates to the industry. BIMCO's forecast of 2500,000 TEI to be broken up in 2016 only cuts into the fleet by a fraction representing 1.26% of the current fleet size. (Bimco)
- Comparisons are being made to 2009 when approximately 1.3 million TEU was removed from a considerably smaller fleet. The mass scale lay ups were triggered by the fact that lines ran out of cash. The industry is not there yet as some lines are still making a profit and the very low fuel prices are propping them up. But a further two or three quarters of declining financial profitability may trigger a notable rise in the idle fleet as we enter the second half of 2016. (Drewry, Jan 2016)
- The overcapacity build during from 2010 to 2015 assed 4.5million TEUs...at a time of slowing demand, and Drewry noted in its Container Insight Weekly that the 450,000 TEU of capacity it expected to be scrapped this year would account for just 2 percent of the global container fleet to 20 million TEUs. (joc.com, Jul 2016)
I think the container ship market will take 2-4 more years to recover. For companies to demolish, things need to remain bad a long time.
Mega Ships
New larger ships are being delivered, with capacities of 10,000 to 19,000 TEU, compared to the older panamax ship previously (4,200-4,600 TEU). The aim is to lower shipping costs, especially fuel, as larger ships are more efficient when full.- In 2015, 119 ships with 10,000+ TEU capacity accounted for 87% of the total new capacity being ordered. The other 118 shipds ordered, ranging in size from 1,000 TEU to 5,300 TEU accounted for only 13%. (Bimco)
Two problems with this. First, its no help when everyone orders them at the same time. Second, with low fuel prices, the large ships may not be much more cost effective:
- The continued low crude oil prices exacerbate the vessel-oversupply. Two years ago, one of the advantages of the Megas was their fuel efficiency, but today's low bunker prices hurt the carriers more than help them as the 6,000-8,000 TEU ships are kept in service since they can still operate economically against the megas. This serves to keep more capacity afloat and in service. (xeneta)
Panama Canal Widening
Previously, panamax class ships (4,200-4,600 TEU) were used to navigate the Panama canal. With the widening of the canal this year, larger ships (e.g.: 10,000 TEUs) can run the canal instead. This has led to a 'cascading' effect in the industry, as 7,000-12,000 TEU ships replace 4-6,000 TEU ships, and they in turn replace 2,000-4,000 TEU ships further down the hierarchy.- “The opening of the new Panama Canal in June has created a surplus of old Panamax ships of around 4,500 TEUs,” Drewry said. “This size and design of ship — previously one of the workhorses of the container ship industry — has essentially been made redundant. More Panamax vessels will surely head for the scrapyards of South Asia, as their owners or charterers replace them by newer and more efficient 8,000-plus TEU ships.” ....There are at least 23 Panamax ships anchored in Southeast Asian lay-up sites in Labuan, Davao and Batum and “with grim immediate prospects, more ships of this class will join the lay-up pool.” Twenty-two 4,000-TEU to 4,800-TEU ships, including some as young as 14 years, have already been sold for scrap this year. (joc.com, Jul 2016)
- Furthermore, the opening of the new Panama Canal in June has created a surplus of old “Panamax” ships of around 4,500 teu. This size and design of ship – previously one of the workhorses of the containership industry – has essentially been made redundant. More Panamax vessels will surely head for the scrapyards of South Asia, as their owners or charterers replace them by newer and more efficient 8,000teu+ ships. (drewry, 2016)
- There were 211 panamax vessels plying panama canal at early 2015. (tradewindsnews, Feb 2015)
Other Things
The charter cost of the ship charter is a small proportion of the total running costs:- ...if you really look at the composition of the operating cost for the container operators, the charter cost or the ship cost accounts for anywhere between 10% to 20% depending on the vessel side [size?], so charter cost is not really a material consideration, whereas the fuel cost, loading cost, the box rates, IT, cargo canvassing and all the other cost are more relevant in aggregate. (Seaspan 2016Q1 conference call)
Conclusion
Cyclical, not 'buy-and-hold'. I think rates will take 2-4 years minimum to recover. A recession may speed things up a bit - make the pain sharper, leading to more ships being scrapped.Panamax ships may be redundant now.
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