In autumn 2008, the collapse of the US-Investment bank Lehman Brothers triggered the next round of the financial crisis and became widely acknowledged as a symbol for the latter. The sharp economic decline that followed turned the entire container shipping industry upside down within a couple of months.
Exacerbated by tremendous de-stocking movements, the volume of containers handled dropped by some 17% y-o-y in the 1st quarter of 2009. As a result the freight rates deteriorated sharply as liner operators were fighting over market shares in a falling market. Since the end of 2008, both scrapping and idling of container vessels soared and the seemingly endless flow of newbuilding contracts of the previous years came to a total standstill. Ever since then, the container charter markets have been experiencing an unprecedented depression. While most analysts expect the total slot overcapacity to last until around 2015, the outlook for smaller container vessels is slightly better due to their comparatively high scrapping potentials and significantly smaller order book.
Demand growth returning
An element commonly overlooked in the analysis of container handling volumes is that the markets have already been gaining momentum since the 1st quarter of 2009. By the 3rd quarter, the y-o-y decline had already reduced to around 11% and it is foreseeable that the first quarter of 2010 will see significantly improved handling volumes compared to the 1st quarter of 2009.
Nonetheless, after the expected almost double-digit decline in 2009, not even the recent, more optimistic economic forecasts for the year 2010 leave enough room to recover all the volumes that were lost during the crisis. Currently, ISL expects container handling volumes to increase by 6–7% in 2010, before returning to a slightly more vivid growth, fuelled by the economic activity returning to its long term growth path in 2011.
Supply side developments
Between Oct. 2003 and Oct. 2008, the slotcapacity of the fully cellular fleet had been increasing by 13.6% per annum. Compared to this, the fleet expansion – contrary to what should have been expected according to the order book – has been decelerated severely to 7% during the past twelve months. Here, a number of factors have been at work. First of all, scrapping of older vessels reached an astonishing volume of about 350k TEU since Oct. 2008. This trend is expected to continue, whereby in the current market environment almost any vessel older than 22 years can be considered a likely scrapping candidate. Apparently there have also already been some younger vessels sent to the scrap-yards – presumably those with an above average fuel consumption or larger repairs to come. Secondly, an increasing number of new vessels with delivery expected in 2008/2009 has been delayed and the latest statistics from Lloyd’s/Register reveal that around 45% of all contracted vessels are postponed by eight months on average. Both factors are expected to continue over the short term, whereby the effects of the delayed deliveries will wear off over the course of the year 2010, as additional delays blend with additional deliveries of vessels genuinely foreseen to hit the seas in 2008/2009. The biggest uncertainties currently revolve around the number of cancellations. Although there seems to be a consensus among market observers that approximately 20% of the five million TEU strong order book are likely to be cancelled, still only limited evidence of this can be found in the statistics.
Market balance and outlook
The large number of ships that have been scrapped were not enough to overcompensate the steep decline in demand for container shipping. As a result, the number of vessels lying idle skyrocketed early in 2009. Between Apr. 2009 and Oct. 2009, the inactive capacity hovered around 1.3 mill TEU, reaching 1.4 mill TEU at the beginning of November according to AXS- Alphaliner. With the current summer season coming to an end, the idle capacity is expected to increase further. In total, ISL expects the idle capacity to increase until 2011, before demand growth will outperform supply growth again. Thus the idle vessels will not release the charter markets from their stranglehold in the short run. However, a recent ISL study indicates that, particularly for ships below 3,000 TEU, the outlook is not quite so bad. In this market segment, after continuous scrapping, the majority of vessels are expected to be demanded again by the year 2012, which should have a positive impact on the charter markets already earlier. However, it remains to be seen how much pressure the prevailing overcapacity in the panmax and postpanmax segments will apply to the supply side in the coming years.
Date: 2009-12-17