The steep fall in freight rates in container shipping calls for resolute capacity adjustment. However, loaded with cash and under pressure from state owners or capital markets, shipping lines are dragging their feet, explains analyst Tan Hua Joo, who is based in Singapore and co-founder of research firm Linerlytica.[ds_preview]
Vessel utilisation in the liner sector keeps deteriorating. How bad is it, how much worse will it get?
HJ Tan: We are seeing a sharp fall in demand especially on the Asia-West Coast North America route. Although capacity there is down by 21 % compared to last year, average vessel utilisation is still some 5 % lower. The downtrend has been visible since September. The Asia-East Coast North America route is still holding up relatively well, with capacity utilisation down by just 2 %. On the Asia-Europe routes, utilisation is down by 3 % although overall capacity is 8 % less. There will be more pressure as tighter monetary policy in the US and the European energy crisis impact consumer demand.
Are container lines about to cull more capacity then?
Tan: More capacity withdrawals are needed, this is plain to see for everyone. But it is not so easy in practice for several reasons. Several smaller carriers like China United Lines, TS Line and BAL/LC Group are pursuing IPOs, so they are unable to withdraw capacity in transpacific trades until the IPO is done. Amongst the larger carriers, THE Alliance and Ocean Alliance have failed to make any material capacity cuts as they seek to protect their market shares. Some of the state-owned carriers like Cosco, HMM and Yang Ming are under pressure to maintain their capacity provision in the interests of local exporters. Although there have been some permanent withdrawals on the Asia-WCNA route, these have been partly negated by the fall in port congestion which has the opposite effect of raising effective capacity, especially at Los Angeles and Long Beach where vessel queues have been effectively cleared.
So how do you judge the mood among container lines as we approach the end of the year?
Tan: The mood is clearly negative. The sharp market correction took most carriers by surprise, both in terms of timing and scale. Some carriers were still adding new chartered capacity and making second-hand acquisitions until a month or two ago. In the meantime, the sharp fall in spot freight rates is also affecting long term contracts with more volumes shifting to the spot market. This puts more pressure on carriers with higher shares of long-term business. Contract rates for 2023 will drop materially, in some cases by as much as 70–80 %.
Who are the most »vulnerable« carriers as the markets heads into another downturn?
Tan: Carriers with a high exposure to expensive vessel charters and newbuilding commitments! They cannot even withdraw excess capacity from the market as they are unable to redeploy the ships and the cost of idling is too high. MSC, in particular, stands out for their aggressive capacity expansion. Their total fleet grew from 3.65 mill. TEU in 2020 to 4.57 mill. TEU assisted by second-hand purchases of 307 ships since 2020. They also have an orderbook of 1.95 mill. TEU still to be delivered. Zim is also vulnerable with an outstanding orderbook of 67 % or 369,000 TEU and the highest charter fleet exposure among the main carriers at 94 %. Yet, I don’t expect to see major casualties because there is one fundamental difference this time: All the main carriers have excess cash and much improved balance sheets. They can survive a prolonged downturn.
Interview: Michael Hollmann