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Container Shipping Quarterly
Demand growth to outstrip container ship capacity despite new orders
By Greg Knowler
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AFTER FOUR YEARS of overcapacity in container shipping, the pendulum has swung the other way, leaving the industry divided over whether carriers need to increase their orders.
A recent spate of mega-ship orders has revived the excess capacity discussion, even though data shows growth in demand will likely exceed available capacity for the next few years. Volume in 2021 will increase 7.5 percent, while deployed capacity will rise 3.5 percent, the first time since mid-2017 that demand growth has outpaced that of supply, according to data from IHS Markit, parent company of The Journal of Commerce.
But a greater balance between demand and supply will return over the next two years, with demand growth slowing to 4.9 percent in 2022 on top of capacity growth of 3.2 percent, and demand falling to 3.1 percent in 2023 when capacity will grow 2.1 percent.
The container ship orderbook remains relatively low, but at 3 million TEU, it is equal to 12.8 percent of the world’s fleet, up from 10.7 percent in 2020, according to IHS Markit. In 2007, the orderbook-tofleet percentage reached 54 percent. The tonnage sitting idle is currently at 1 percent of the fleet, compared with 10 percent just 12 months ago.
With the global fleet fully utilized to serve continuing strong demand on the major east–west trades, carriers have hung on to older vessels; just 7,900 TEU has been confirmed for the scrap heap so far this year, IHS Markit data shows. Over the past 10 years, an average of 300,000 TEU has been scrapped every year, with 194,000 TEU demolished in 2020.
Hapag-Lloyd CEO Rolf Habben Jansen told reporters during a March briefing that scrapping of vessels is expected to increase in the next two years, and scheduled vessel deliveries in 2022 will be at a record low, so overcapacity is not a concern at the moment. In fact, Habben Jansen suggested carriers need to order more ships to keep up with demand and fleet replenishment.
“The orderbook is too small,” he said. “You need to replace what is taken out. We need 14 to 17 percent, and today we are at around 11 percent of the current fleet on order. But it is not like the 50 to 60 percent orderbook that we saw in the past.”
Eli Glickman, CEO of Zim Integrated Shipping Services, also raised concerns that there will not be enough supply in the medium term to meet demand, pointing to the low ratio of orderbook to total fleet. Zim, which charters most of its vessels,
recently struck an agreement with Seaspan to charter 10 vessels with capacities ranging from 10,000 to 15,000 TEU.
Risk of oversupply?
Most analysts agree that carriers need to bring in new tonnage to replace older vessels with larger and more fuel-efficient ships, but there is some debate over whether the industry is heading for another round of overcapacity as new ship orders come rolling in.
After years of restraint, HapagLloyd in December ordered six liquefied natural gas (LNG)–powered ships of 23,500 TEU that will be delivered between April and November 2023. Its partner in THE Alliance, Ocean Network Express (ONE), placed an order in December for six 24,000-TEU ships scheduled for delivery in 2023–24. OOCL has ordered five ships of 23,000 TEU, also due for delivery in 2023. On top of mega-ship orders, Alphaliner reports that a significant number of orders have been placed for neoPanamax vessels of between 12,000 and 16,000 TEU.
Rahul Kapoor, vice president of research and analysis, maritime and trade at IHS Markit, said he believes the supply/demand balance should remain in favor of the carriers over the next few years, despite the recent new vessel orders.
“The orderbook has fallen way below the replacement levels over the last 24 months, and what we are seeing now is normalization of the orderbook,” he said. “We are not seeing any major signs of speculative ordering, and that should help supply/ demand balance remain in sync.”
Alan Murphy, CEO of SeaIntelligence Maritime Analysis, said pre-pandemic demand growth
Container vessel orders as share of fleet increase for first time since 2015
Global container ship fleet and orderbook capacity, with percentage of capacity on order 25 30%
20
TEU ( millions
15
10
5 25%
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15%
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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021* 0%
Total In service Total On-order % of fleet on order
*Note: as of March 2021 Source: IHS Markit © 2021 IHS Markit
levels will not return before “sometime in 2022.”
“Overall, the carriers are still very restrained in their orders, and I expect this to continue,” he told The Journal of Commerce. “Their approach is that profitability outweighs market share, and they are fully aware that the current demand is temporary and driven by COVID-19 disruption.”
Peter Sand, chief shipping analyst at maritime association BIMCO, told The Journal of Commerce there is no need to add capacity to the current fleet, asserting the current heavy demand is a result of “many related and rare events.”
“BIMCO sees nominal fleet growth of around 3 percent in 2021 and close to that also for 2022,” he said. “In my eyes, that signals no urgent need for extra capacity. New orders may be placed for fleet renewal programs, but if the obsolete tonnage is sold for demolition, this is neutral, all other things being equal.”
Landside absorption
Simon Heaney, senior manager of container research at Drewry,
Demand growth to outpace container capacity through 2026
Year-over-year change in global container ship fleet capacity and demand, with forecasts 12%
7%
2%
-3%
-8%
-13%
2017 2018 2019 2020(f) 2021(f) 2022(f) 2023(f) 2024(f) 2025(f) 2026(f)
Container fleet capacity Demand
Source: IHS Markit, GTA Forecast © 2021 IHS Markit
Container ship scrapping activity lowest since 2011
Total global container ship capacity demolished annually, in TEU 700,000
600,000
500,000
400,000
300,000
200,000
100,000 7,907 TEU
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021*
*Note: as of March 2021 Source: IHS Markit told The Journal of Commerce the analyst’s supply/demand projections are based on landside disruptions continuing for most of 2021.
“Under normal conditions, the market would still be oversupplied, but it doesn’t seem that way right now only because the huge reduction in port productivity has trimmed the effective fleet capacity,” he said. “Long waits outside ports and slower turnarounds at berth mean that you need more ships to do what you were doing previously.”
Heaney said fortunately for carriers, conservative ordering during the last couple of years should bring supply/demand improvements, and Drewry expects demand to outstrip supply through 2022.
However, most of the megaships on order will start sailing from early 2023, and Heaney said that combined with the huge increase in ship charters so far this year to handle the strong demand has again raised the prospect of a return to “painful overcapacity.”
“Obviously, a lot will depend on prevailing demand conditions, and owners will be able to mitigate the situation somewhat through demolitions and blank voyages, but the level of new orders tells me that the industry hasn’t changed at all,” Heaney said. “These ships are being ordered as if they are for today, not what the market will look like when they are ready for delivery.”
In addition to the demand prediction difficulties over the next few years, uncertainty over the timing and composition of zero-carbon fuels is also dulling carrier appetite for new tonnage. This could further reduce the likelihood of sector-wide overcapacity, given that research into viable new fuel types is still in its early stages.
Vincent Clerc, CEO of ocean and logistics at Maersk, said during the JOC’s virtual TPM21 conference the COVID-19 capacity crunch has not prompted a rethink of the company’s conservative spending plans for new ships, adding that environmental regulations are making carriers even more cautious on long-term asset investments. JOC
email: greg.knowler@ihsmarkit.com twitter: @greg_knowler
Scrubber resurgence
Rising low-sulfur fuel price could spur scrubbers on new ships: BIMCO
By JOC Staff
A WIDENING SPREAD between prices for low- and high-sulfur bunker fuel is lowering operating costs for ocean carriers that have equipped their ships with sulfur scrubbers, according to data from shipping association BIMCO, which foresees more new ships hitting the water with scrubbers thanks to the cost savings.
Scrubbers allow ocean vessels to continue burning cheaper high-sulfur fuel oil (HSFO) while still meeting the International Maritime Organization (IMO) mandate to reduce global sulfur emissions from shipping that went into force Jan. 1, 2020. But the COVID-19 collapse in oil prices last year sent the price spread between the two types of fuels to new lows, making the economics of using scrubbers less viable.
With oil prices now on the rise, scrubbers are becoming more attractive again, said Peter Sand, BIMCO’s chief shipping analyst.
“There is a clear tendency that it is the large ships that burn most bunkers which have been preferred for scrubber installations. But it goes for all: As voyage costs are lowered, earnings are higher,” Sand said in a statement.
BIMCO data shows the spread between low- and high-sulfur fuels has widened to $118 per metric ton in Singapore, the world’s largest bunker hub. Panama and Middle East bunker hubs show fuel price spreads above the Singapore spread level for the two types of fuels, while US and European bunker hubs sit at or under a $100/mt spread.
According to price reporting agency OPIS, a sister company of The Journal of Commerce within IHS Markit, the spread between HSFO and very low-sulfur fuel oil (VLSFO) was $102/mt in both Singapore and Rotterdam on March 17. That’s up from $63/mt in Singapore and $39/ mt in Rotterdam last June 1.
Carriers such as Mediterranean Shipping Co. invested heavily in scrubbers in the run-up to the IMO 2020 sulfur cap. BIMCO data released March 18 shows 15.9 percent of the global container ship fleet, accounting for 28.7 percent of TEU volume, is now equipped with scrubbers.
Sand said the current spread may favor more ship owners going with scrubbers for new vessel orders in the months ahead.
“As the bunker price spread now seems to have found a steady level slightly above $100 per metric ton, ship owners and investors are increasingly likely to order new ships with a scrubber pre-installed today, when compared to the sub$100 spread of last year,” he said.
Analyst Alphaliner previously noted that pre-COVID-19 spreads of $150 to $200 meant carriers would have to wait just one to two years to break even on their scrubber investment. When spreads fell to about $60, that extended the payback time to four to five years. JOC
The widening gap between low- and high-sulfur fuel prices is reducing the time required for an investment in scrubbers to break even.
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VLSFO, HSFO bunker prices steadily increasing from 2020 trough
Average high- and low-sulfur fuel prices in Rotterdam, New York, and Singapore ports, with percentage differential $540 90%
Price per metric ton (USD)
$490 $440 $390 $340 $290 $240 $190 $140 80%
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$90 10%
20-Mar-204-Apr-2019-Apr-204-May-2019-May-203-Jun-2018-Jun-203-Jul-2018-Jul-202-Aug-2017-Aug-201-Sep-2016-Sep-201-Oct-2016-Oct-2031-Oct-2015-Nov-2030-Nov-2015-Dec-2030-Dec-2014-Jan-2129-Jan-2113-Feb-2128-Feb-2115-Mar-21
Low-Sulfur Bunker Fuel High-Sulfur Bunker Fuel Price differential %
Percent spread
Better together?
Merged CP-KCS would offer new cross-border intermodal growth ramp
By Ari Ashe
THE PROPOSED MERGER between Canadian Pacific Railway and Kansas City Southern Railway provides new opportunities to grow intermodal business between Mexico and Canada, if the companies can navigate several challenges once the $29 billion deal wins regulatory approval, market observers say.
Some intermodal marketing company (IMC) executives and industry analysts agree there is potential for new container business, but others question whether CP’s US service is quick and cheap enough to compete, and whether there are enough business opportunities to grow intermodal volume.
John Brooks, vice president of grain and intermodal at CP, said he thinks the new direct routes to Minneapolis, Detroit, and Toronto will cause shippers to convert truck freight to intermodal. No Mexico-to-Midwest routes exist today without an interchange in Laredo, Houston, Dallas, or Kansas City.
“As I looked at the truck traffic from Mexico, to Chicago, to Detroit, to Minneapolis, and up into Toronto, there’s just a massive amount of freight that should be moving on the rail network,” Brooks said on a March 21 investor call. “We’re going to offer a service that flat-out doesn’t exist today — a single-line haul — and we frankly only really need to capture a fraction of this market to be a needle mover in terms of synergies. This is going to be very compelling to our shippers.”
CP told The Journal of Commerce in an emailed statement that the merged CP-KCS network will benefit shippers both large and small.
“Together, Canadian Pacific and Kansas City Southern would have the ability to deliver unsurpassed levels of service, safety, and efficiency to shippers and communities, while also increasing competition and supporting economic growth and environmental sustainability in the US, Mexico, and Canada,” the company wrote. “This transaction will make possible capital investment that would not be possible otherwise. That capital combined with our operational excellence will make this new, compelling service possible.”
Larry Gross, founder of Gross Transportation Consulting, agreed there are opportunities to move containers between Canada and
Mexico that have eluded railroads in recent years. Data from the Intermodal Association of North America (IANA) shows Canadian loads account for less than 4 percent of the intermodal loads entering or exiting Mexico.
“There is an opportunity to put together a system with good service that eliminates the pain points of both interchanges and two border crossings,” Gross told The Journal of Commerce.
One problem is that the tunnel under the Detroit River cannot handle double-stacked containers. To reach Toronto, intermodal trains must either be single stacked under the Detroit River and taken the 230 miles from Windsor, Ontario, to Toronto, or double stacked through Buffalo, New York, and taken 100 miles to Toronto in coordination with CSX Transportation.
Gross said there are also opportunities to grow Mexico business in
Detroit and Minneapolis. Neither is a huge intermodal market, but Gross said they are large metropolitan areas with consumer demand for basic necessities.
“A lot of freight goes where people go. And there are a lot of people who live in Detroit and Minneapolis who buy goods,” he said.
But before any of that happens, the US Surface Transportation Board must approve the merger, a process that isn’t expected to be completed until 2022.
Volume, pricing obstacles
On the March 21 investor’s call, CP executives highlighted direct routes connecting the US–Mexico border with Chicago, Detroit,
TFoxFoto / Shutterstock.com
