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>> MDST's projections for 2017.more.

>> SM Line - its first months.more.

>> North American East Coast Port Expansion.more.

>> Japan-EU Trade Deal.more.

>> The Ocean Network Express.more.

>> The Qatar crisis: impact on container shipping services.more.

>> Maritime Professional Services Award.more.

>> Invest in rail freight to cut road congestion.more.

>> South Bradford Lorry Parking Study.more.

>> New Mega Alliances.more.

>> Businesses have their say on freight transport in the Marches.more.

>> Free trade zones at UK ports & airports.more.

>> Non alliance shipping lines.more.

>> New mega alliances.more.

>> Transpacific - port coverage from April 1st.more.

>> Are direct services becoming less attractive for shipping lines?. more.

>> What happens to the small ships post Panama Canal expansion?. more.

>> Maersk to acquire Hamburg-Sud and reinforce its presence on the Latin America routes. more.

>>£0.5 trillion of trade passes through UK ports. More.

>> The future of rail freight and private investment. More.

>> The Northern Freight and Logistics report. More. 

>> Oxford Cambridge Expressway Study. More.

>> The potential impact of Brexit on trade. More.

>> India - the impact of shipping lines’ consolidation and the cabotage rule change. More.

>> Iran – changes in maritime services post-sanctions. more.

>> 'India: The only way is up' say MDST in an article published by Lloyds List. More.

>> Hanjin’s collapse - A wake-up call to the industry? More.

>> Peak season 2016: could the seemingly more rational shipping lines restore stability to the market?. More.

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Peak season 2016: could the seemingly more rational shipping lines restore stability to the market?

During the first half of 2016 the container shipping industry has seen global demand (excluding intra-regional flows) growing by a mere 1% compared to the same period of 2015 and for the third quarter we project a feeble annual growth rate of 0.6%. These gloomy performances, along with freight rates declining at a faster rate than costs, have led shipping lines to announce further consolidation in their services during the traditionally busiest quarter of the year.

So far, the major shipping lines that have announced their decisions to consolidate their services have been CMA-CGM, G6 Alliance and MSC. This has resulted in supply (excluding intra-regions traffic) decreasing by 3.5 %, down from 98.6m TEU in 2015Q3 to 95.2m TEU in 2016Q3. At this time last year, capacity was growing at a solid 7.8%.

These announcements came after a remarkable process of scrapping that characterised the first half of 2016. During the first six months of 2016, more than 240,000 TEU have been scrapped compared to approximately 126,000 TEU scrapped during the same period of 2015. In terms of number, so far this year, only one more vessel has been scrapped compared to 2015H1, however, the features of these vessels are quite different to the ones sent to the scrap yard last year: they are larger and younger. Last year only one ship bigger than 5,000TEU was scrapped (a ship of 5,550TEU, deployed on the Far East-South America West Coast trade lane) whereas 13 ships in the range of 5,000-7,499 TEU have been made redundant since the beginning of 2016. Furthermore, the average age of the 83 ships scrapped during the first half of 2015 was 25 years whereas that for the 84 scrapped during the same period this year is 22, with vessels in the range 5,000-7,499TEU being only 17 years old.

The following figures illustrate these results.

Figure 1: Containerships scrapped by ship size, TEU Source: MDS Transmodal, Containership Databank, July 2016

Figure 2: Containerships scrapped by ship size, ship ageSource: MDS Transmodal, Containership Databank, July 2016

The reduction in supply could bring some improvement in utilisation levels. For this to materialise, however, the industry need the scrapping process to endure.  Analysing the key points at which supply and demand can be measured at a global level (i.e. services passing through the Suez Canal and crossing the Atlantic and the Pacific), we do not expect the load factors to recover in the immediate future. On the contrary, utilisation levels are expected either to remain stable (i.e. Transpacific) or see some contraction (i.e. Suez and Transatlantic) as 2016Q3 proceeds.

Our projections are shown in the following figures.

Figure 3: Allocated capacity (mTEU) vs Demand (mTEU) - services passing through the Suez Canal Source: MDS Transmodal, Container Business Model, August 2016

 

Figure 4: Allocated capacity (mTEU) vs Demand (mTEU) - services across the Atlantic Source: MDS Transmodal, Container Business Model, August 2016

 

Figure 5: Allocated capacity (mTEU) vs Demand (mTEU) - services across the Pacific Source: MDS Transmodal, Container Business Model, August 2016

 

What to expect in the medium-term future? Will the reduction in supply eventually stabilise the market and bring the load factors, in turn freight rates, to more sustainable levels?

In the recent past we have seen discouraging demand and yet shipping lines have endured in flooding the market with superfluous capacity. What seems to be triggering the changes in the shipping lines’ strategies and encouraging them to initiate an enduring process of scrapping is the environment in which they operate; carriers merged/acquired into bigger groups as well as extended Alliances are now encouraged to adopt more sensible strategies. One of the advantages of being a part of the same group is the possibility of exchanging vessels, as recently shown by Cosco & China Shipping: Cosco’s vessels have been deployed on Ocean Three services on the Asia-Europe trade lane. Alliances and M&A will increase shipping lines’ scale and improve their network, helping them to operate more cost effectively. During the last decade unit costs are estimated to have gone down by approximately 20% on the services passing through the Suez Canal as speeds fell and ships grew. The optimisation could result in more sustainable freight rates (at least from a shipping line’s perspective). Shippers entering in negotiation with their counterparts, will need to look closely at shipping lines’ costs structure.

The following table shows the changes in cost components between 2006Q3 and 2016Q3.

Table 1: Costs for the services passing through the Suez Canal, 2016 vs 2006

   
   

2006Q3

2016Q3

% Cost Component of Total Costs

2016Q3 v 2006Q3

2006Q3

2016Q3

%

Absolute

Allocated Capacity ('000sTEU)

8,319

12,239

 

 

47%

3,920

Demand ('000sTEU)

5,867

8,588

 

 

46%

2,722

Utilisation

71%

70%

 

 

-1%

-0.4

             

Revenue (mUS$)

7,837.1

7,990.0

 

 

2%

153

             

Direct Costs (mUS$)

 

 

 

 

 

 

Handling Costs (mUS$)

1,535

3,042

21%

35%

98%

1,506

Container Costs (mUS$)

457

896

6%

10%

96%

439

Variable Overheads (mUS$)

519

733

7%

8%

41%

214

Total Direct Costs (mUS$)

2,511

4,671

35%

54%

86%

2,160

             

Contribution (mUS$)

5,326

3,319

 

 

-38%

-2,007

             

Fixed Costs (mUS$)

 

 

 

 

 

 

Bunker Cost (mUS$)

1,771

867

24%

10%

-51%

-904

Time Charter Equiv (mUS$)

1,763

1,273

24%

15%

-28%

-490

Port & Canal Costs (mUS$)

559

875

8%

10%

57%

316

Fixed Overheads (mUS$)

638

1,044

9%

12%

64%

406

             

Total Fixed Costs (mUS$)

4,731

4,060

65%

46%

-14%

-671

Total Costs (mUS$)

7,241

8,730

100%

100%

21%

1,489

Unit Cost (US$/TEU)

1,234

1,017

 

 

-18%

-218

Source: MDS Transmodal, Container Business Model, August 2016