Container shipping: Defying the odds during the pandemic?

The massive consolidation drive in the container shipping market that dominated the narrative over the past four years seems to have brought about unexpected benefits during the coronavirus crisis.

The driving force behind the phenomenon has been primarily achieving economies of scale, especially considering the amount of capital investment needed in new, ever bigger ships.

As such the potential for achieving synergies through mergers and acquisitions has been much larger for container shipping when compared to other pure bulk operators.

Considerable reduction of the number of competing container carriers on the market when compared to 2016 has resulted in greater control of vessel capacity.

“During this crisis, we have seen a completely different atmosphere as far as the liners are concerned when compared to what happened in 2016,” John Coustas, President and Chief Executive Officer of Danaos Corporation, said during a recent Marine Money webinar.

“Historically, this has been the biggest contention issue in terms of liner companies maintaining box price stability. What we have seen now is that despite the dramatic drop in volumes, which is probably larger than in 2018 and 2009, the actual box rates have not only kept up but have, overall, firmed considerably.”

The sector has been very successful in keeping supply broadly balanced with demand even as demand tumbled, through a program of blanked sailings, which have been supported by the consolidation in the liner industry and desires to avoid a repeat of 2016. I actually think the liner sector has handled this about as well as it could do,”MSI’s shipping analyst James Frew told Offshore Energy-Green Marine in a comment.

The control over vessel capacity has been mainly exercised through the blanking of sailings and idling of excess ships to match the demand situation. The push has served as a strong underpinning for the freight rates, as explained by Danish consultancy Sea-Intelligence earlier.

Carrier alliances have been very disciplined in maintaining this balance, which resulted in the total blank sailings crossing the 4.0 million TEU mark in Q3, Sea-Intelligence’s data shows.

According to the latest update from the consultancy, the freight rates are strengthening on the Transpacific and Asia-Europe trades, with Asia-US West Coast increasing by 102% and Asia-US East Coast by 22% following the post-Chinese New Year bottoming out.

Freight rates on Asia-Europe have also increased following the post-Chinese New Year decline, in line with Asia-US East Coast, with Asia-North Europe increasing by 21% and Asia-Mediterranean by 13%.   

“Freight rates have so far held up on the Far East to US West Coast trade, up USD 260 per FEU to USD 1,925, and are in fact at their highest level since Q1 2019. However, this has only been driven by widespread blanking of sailings which has driven the idle container shipping fleet to record highs,” BIMCO said in a recent market report.

“While this supports freight rates, the idle container ships are still costing owners money. How long carriers will continue to blank sailings to support freight rates remains to be seen.”

Alphaliner believes that carriers might have over-estimated the level of demand contraction in May, as capacity shortages on certain routes have already started to push spot freight rates up.

“Notably, spot freight rates from China to the US West Coast have surged to a 18-month high to reach $2,097/FEU on 29 May with roll-pools developing at various Chinese ports. It remains to be seen if the higher rates will hold, as capacity is rapidly returning to the US West Coast,” Alphaliner said.

In an effort to take advantage of the stronger-than-expected demand, Zim has even announced the launch of a new Transpacific express service from the Far East to California.

Despite the spot rates holding up, the container shipping segment has been hit hard by the Covid-19 pandemic disrupting supply chains, limiting consumer spending and hurting global economies.

Hence, the road to recovery of the sector is expected to be bumpy and long. Due to the overall situation, carriers have been on the lookout for cost-cutting opportunities, and one of them has been avoiding canal dues at the Suez Canal and opting to sail around the Cape of Good Hope on the backhaul, and even on the fronthaul.

This was facilitated by the lower fuel prices, and the fact that bypassing the canal doesn’t change the transit times that much.

Consequently, transits of container ships in the Suez Canal have dropped by 32% year-on-year in May to settle at an all-time low of 330, according to BIMCO.

“The idle container ship fleet has remained at record-breaking levels through a solid portion of 2020, with container ship transits through the Suez Canal reflecting the widespread blank sailings, dropping 32% year-on-year in May.

“Container carriers are stuck between a rock and a hard place, where high container spot freight rates must be sustained by massively restricting capacity on the market. Escaping this requires a substantial pick-up in demand,” said Peter Sand, BIMCO’s Chief Shipping Analyst. 

The inactive containership fleet has reached an all-time high of 2.72 Million TEU at the end of May, equivalent to 11.6% of the overall fleet capacity, according to Alphaliner.

The burden of removing excess capacity from the market has, however, not been equally shared by all of the main carriers.

Alphaliner’s latest fleet survey shows that the ‘inactive fleet share’ of the twelve largest carriers ranges from just 1.8% for Wan Hai to a massive 32.9% for HMM. The 2M partners Maersk and MSC account for the bulk of the inactive fleet, with a combined total of 854,000 TEU.

As explained, more than half of this vessel inactivity is due to scrubber installations.

Alphaliner expects the inactive fleet to peak shortly, as lockdowns across many countries are eased and a recovery in demand gets underway.

For the month of June, Alphaliner currently expects average weekly capacity at 10% above the levels of May as carriers re-instate blank sailings and add extra loaders.

Maritime Strategies International (MSI) estimates that Asia Europe and Transpacific headhaul trades would fall by more than 10 % this year, but sees corresponding rebounds in 2021.

North-South and Non-Mainlane East-West trades are projected to fall by less but subjected to greater downside risk. Intra-regional trade is expected to more robust, particularly in terms of Asian production for Asian consumption.

MSI’s shipping analyst James Frew said during the webinar that net fleet growth was slowing down and projected a net negative fleet growth for the next three years.

“For most vessel classes, we see the bottom of this container cycle to be the next quarter, where charter rates would bottom out in Q3 2020, before recovering in 2021.“

“Those bottom lows are nowhere near the bottom lows we saw in 2016,” he said.

As explained, fewer blanking of sailings is expected in Q3 2020 and by Q4 the situation is likely to normalize, but of course in line with demand prospects.

Commenting on the recovery in 2021, Frew said that the idle fleet is expected to cap that recovery and suppress charter rates.

“We think you will have to wait until 2022 to recapture the 2019 highs,” he added.

There is good news on the supply side, nevertheless.

Withdrawal of numerous shipping banks has impacted to a great extent the balance between equity and debt of shipowners, which, in the long run, has limited the ability of companies to secure finances to order new ships.

“The lack of finance is also responsible for the restraint in ordering newbuildings. It is the newbuildings that will destroy the market in the long run,” Coustas concluded.

Keeping box rates stable coupled with historically low prices of fuel makes the overall financial result of the liner companies pretty neutral, if not positive, Coustas pointed out.

“We don’t believe liner companies will have losses in 2020. I am not saying that there would be any kind of record profit, but definitely we believe companies will remain in black because of all these factors.”

Commenting on the impact of COVID-19 on Danaos, Coustas said:

“In a company like ours, which has a pretty extensive charter coverage, the effects take time to show. For the time being, we are managing to find employment, but at significantly lower rates.”