Container fleet growth slows to lowest level

Monday, 30 May 2016 00:00 -     - {{hitsCtrl.values.hits}}

Untitled-2Container fleet growth slows to lowest level

The lowest fleet growth on record will not stop the containership fleet breaking through the 20 million TEU mark this year, according to analysis from Bimco. The shipping association said the fleet would grow only 3.4% in 2016 with an estimated net addition of 0.68 million TEU of capacity. This should see the 20m TEU milestone reached in June, Bimco calculates. Over the last decade, the fleet size in TEU increasedby 240% and reached 19.7 million TEU at the end of 2015. 

However, the fleet grew unevenly, displaying a shift to larger ship sizes and giving a one-sided focus on cutting unit costs per transported TEU by having larger ships, continuing the theme of ‘bigger is better’. The ultra-large containership segment (ULCS) was the main driver of growth. It constituted just 0.5% of the fleet in 2007 but now represents 18% of the total fleet in TEU terms. Peter Sand, Bimco Chief Shipping Analyst, said the total containership fleet in TEU had increased annually from 2006 onwards by 9%. 

By contrast, the number of ships increased by only 3.7%. Despite the enormous growth of ULCS market share, the post-panamax fleet of 8,000-12,000 TEUs, in relation to the total share and TEU capacity, is still the preferred shipping class, accounting for around a quarter of the containership fleet, he added. The trend towards larger vessels has hugely accelerated in the last five year. The trend towards higher capacity containerships stands out during the 2006-2016 period said Sand. Therefore, the driver towards the 20 million TEU margin was ultra large containerships and post-panamax vessels between 8,000-12,000 TEUs.

Brexit: could lead to higher supply chain cost

Freight forwarders and 3PLs could benefit from a transitional boost as they manage the supply chain disruption anticipated should Britain vote on 23 June to leave the European Union. But over time slower growth and tighter border controls will reduce revenues and increase costs, according to Wolfgang Lehmacher, Head of Supply Chain and Transport Industries at the World Economic Forum, a not-for-profit foundation committed to ‘improving the state of the world’ via international public-private cooperation. 

He outlined four post-Brexit scenarios as he assessed the potential impact on supply chains should British voters decide to leave the EU: complete independence; loose association with the EU; harmonisation with the EU and participation in another zone such as the North American Free Trade Agreement (NAFTA). In case the UK stayed largely harmonised or associated with the EU little change to supply chains would occur, he said. 

Under the other scenarios logistics set ups and systems would need to be adjusted either immediately or over time, either partially or even drastically. The UK exports about half of its goods to the EU, and Britain is also the single largest export market for the rest of the EU, according to Robin Niblett, Director of think-thank Chatham House. Brexit would mean Britain negotiating new terms of access to the EU market and crucially to the more than 50 countries to which the UK currently has access through EU trade deals. Lehmacher said any additional trade barriers added to procurement, production and distribution processes by Brexit would be reflected in cost structures and prices. 

Shipping lines face losses of billions in 2016

Collapsing freight rates cancelled out greater unit cost savings in the first quarter, with maritime analyst Drewry updating an earlier forecast and predicting the container shipping industry was now on track to lose up to $ 10 billion during 2016. Carrier profit margins this year will be influenced by big swings on both prices and costs, but as things stand carriers will lose between $ 6 billion to $ 10 billion this year. Repeating the same cost savings will get tougher as the year progresses with bunkers on the rise, making it even more important for carriers to get freight rates off the floor, Drewry said. 

Spot freight rates on Asia-North Europe last week were 26% lower than during the same week in 2015 and down 13% year-over-year on the Asia-Mediterranean routes, according to the Shanghai Containerised Freight Index. However, the rates hit record lows during 2015, falling below $ 200 per 20-foot-equivalent unit on Asia-Europe. The dismal rate level was profit at the world’s largest carrier, Maersk Line, declining sharply in the first quarter, a universal trend among the carriers that have reported their earnings. 

Falling average freight rates were another common feature, with Maersk reporting a 25% decline year-over-year. Although it is not only spot prices that are at poor levels, Maersk Line Chief Executive Officer Soren Skou said that contract freight rate on Asia-Europe and the trans-Pacific were much lower than those signed last year and the carrier would be placing a greater focus on the spot market. While the world’s largest carrier did see its earnings before interest and tax decrease by 98% to $ 16 million, Drewry said most analysts were predicting further heavy losses after the $ 138 million loss incurred in the final three months of 2015. 

Maersk’s turnaround was achieved on the back of a 16% unit cost saving, helped by a 50% reduction in fuel expenditure. According to the maritime analyst’s calculations, the carrier industry made an operating profit of about $ 5 billion in 2015 as they were able to keep unit costs below unit revenue for most of the year. The gap narrowed as the year progressed and the operating margin diminished with each passing quarter until costs exceeded unit revenue in the fourth quarter. Early data showed the differential narrowed to $ 16 per TEU in the first quarter, from $ 25 TEU in the fourth quarter. 

Robots to transform warehousing

Fully automated, robotised warehouses using robots to pick products at piece level will come sooner than many people think and will transform warehousing, according to innovation experts speaking at a seminar on disruptive innovation at this year’s Multimodal event in Birmingham, UK. Responding to a question from Lloyd’s Loading List, Will Whitehorn, whose roles have included Chair of the Innovation Implementation Initiative Transport Systems Catapult, as well as a Board Member of Transport Company Stagecoach, said that with any disruptive innovation, some of the implications are impossible to foresee. 

But he said removing people from the warehouse opened the possibility to radically transform their use, for example by removing certain health and safety requirements or the need for them to be maintained at room temperature. By taking humans out of warehouses, we can completely change the types of warehouse being operated and if you combine that with 3D printing – which is already being used in industries such as aviation, where airlines are 3D printing spare parts at airports rather than storing them in DCs – then you are going to see a completely different type of warehouse in operation, he said. 

Dominic Regan, from technology firm Oracle said that commodity warehouses had been becoming automated for years, but full automation was the obvious next stage. That technology was only just now becoming available.

Container freight rate and poor service delivery

Shippers and logistics providers are paying for the current unsustainably low container prices on major trades by having to adjust to lower service levels and reliability, according to some senior forwarding executive, although carriers can’t afford to let service levels slip too much for fear of losing business. The current low ocean rates on major trade lanes such as Asia-Europe was good news for shipper customers from a price point of view and this can accelerate business to some extent, Kim Pedersen Executive Vice President of Geodis Freight Forwarding told Lloyd’s Loading List. 

But the reason the rates are low that there is not enough volume versus the capacity is really a worry. The capacity with the big ships is a struggle and what happens is that the shipping lines take capacity out of the market or they simply lower their service level and that’s what we see as the challenge. The carriers are using all kinds of ways to try to reduce their costs and eventually it brings down the on-time performance. It’s just incredible that we have the most important commodity of global logistics, ocean freight, delivering less than 80% on-time performance, Pedersen added. 

That is exactly the vicious circle we are in right now, where we try to team up with certain carriers to ensure that we get the service level our customers deserve. 

Asia-North Europe rates slip further

Container spot rates on the Asia-North Europe trade slipped for a second consecutive week last week, although at $ 606 per TEU, the level is still nearly three times the record low of USD 205 per TEU recorded in March, according to the latest figures from the Shanghai Containerised Freight Index (SCFI). Last week’s fall of $ 30 or 4.7%, follows a fall of 13% the previous week after May GRIs raised average spot rates to $ 732 per TEU two weeks ago. Asia-Mediterranean rates on the SCFI held up better, falling by just $ 4 or 0.5% to $ 869 per TEU, while on the transpacific trades, the SCFI reported rates down 5.2% to $ 818 on the Asia-US West Coast route, on the back of slower import demand.

(The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP)).

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