BIMCO: Time for Larger Containerships to Idle

The demand situation in the container shipping market is developing a tad slower than what the market had anticipated as the volumes have failed to pick up markedly, BIMCO said in its latest market report.

According to BIMCO, global volume growth in Q1 was just 1.8%, nevertheless, things are moving in the right direction and volume growth across the board is seen reflecting the overall positive macroeconomic development.

Spot freight rates have hit a six-year low, for this time of the year on the major as well as minor trading lanes out of Shanghai specifically and China; with Shanghai-Korea being the only exception.

“The very slow growing demand side combined with a growing supply side has made it extremely difficult for carriers to strike a balance in order to avoid a freight rate meltdown,” BIMCO said.

On the US East Coast a peak seen a couple of months ago when the US West Coast imports were jammed, has disappeared now.

On the main lane from Shanghai to Europe, a new all-time low freight rate was recorded on the first Friday of June, where a TEU could be sent halfway around the world for just USD 284.

On the other hand, there has been increase in charter rates for smaller to medium sized container ships.

The 6-12 months’ charter rates currently seen are almost double that of last year’s, BIMCO’s data shows.The fleet of small and medium sized ships has declined considerably since 2009, shrinking by 6% on average since 2½ years ago, and the trend is set to continue due to continuous demolition and scarce contracting.

“The demand growth finally seems to have erased the overcapacity for these feeder segments as the supply seems to provide the best explanation behind this radical increase in charter rates,” the report adds.

602,000 TEU of newbuilt capacity have been added to the supply side of the container shipping market since January 1st. As demolition activity have only removed 72,000 TEU of containership capacity, the fleet is now 2.9% bigger as compared to the start of the year, according to BIMCO.

30 ships with a capacity of 18,000 TEU or more, 12 in the 10,000-11,000 TEU range and 13 in the range of 1,400-4,000 TEU were ordered.

“The fleet growth is so biased towards larger ships that the question remains: will there eventually be a gap in the market? Recently, we have only seen a positive effect from this. Perhaps, there is room for these size of ships in the market place after the fleet size has been adjusted downwards due to demolition and no new ships, of that size, being ordered,” BIMCO further said.

The overall fleet growth remains on target for the full year at 6.6%.

Included to this number BIMCO expects slippage in deliveries to increase for the rest of the year. This is because the market is well supplied with tonnage similar to that being ordered, and the demand side is not performing very well.  However, the extent of postponements are possible to achieve for shipowners limited by contractual obligations when they enter into discussions with shipyards.

In terms of outlook, until now the rise in charter rates for the small to medium sized container ships have not caused a flurry on newbuilding contracts.

Just six ships in the size between 1,000 and 3,000 TEU have been ordered in 2015, against 72 ships of this size ordered in 2014.

“If the rates remain high, more orders could easily surface. The stronger US dollar against the euro is expected to grow west – bound volume on the transatlantic trades,” BIMCO adds.

The Council believes that the market needs growth in the high volume trades in order to get the market evolution going and create an effective deployment of ultra large containerships as it might cause the idleness that has disappeared from small and medium sized ships to switch to the bigger league.

“From that, we learn that the fundamental balance of the smaller sizes has progressed over the past five years and finally brought around improved charter rates. Now it can be argued that it is time for idle larger ships as the overcapacity is clear and present amongst them. Moreover, while idling some of those units we may see the fundamental balance amongst the larger units improve by a scale that higher spot freight rates would be developed too,” BIMCO concluded.

Images: WSC