Archives for posts with tag: container shipping

Conventionally, the container shipping market is viewed as made up of two key elements: the freight market for moving boxes from A to B, and the charter market for hiring ships. Often these markets are happily moving in sync, but that’s not always the case. How does the relationship work and how closely have these markets moved in relation to each other, both in recent times and historically?

Happy Couple?

Let’s start with recent history. Improved fundamentals in 2016, when box trade grew by 3.8% but containership capacity expanded by just 1.2%, and into 2017, have had a twin impact on the container shipping markets. Firstly they helped the box freight market bottom out. The mainlane freight rate index (see graph) increased from 24 in Mar-16 to 73 in Jan-17, and this pattern has been mirrored across many trade lanes. Secondly, the backdrop eventually helped support a slightly improved charter market, with rates moving away from the bottom of the cycle in late Q1 2017. In theory, demand from freight market end users (shippers) filters down to the vessel charter market in the end, with additional volume driving charterers (liner companies) to access additional units (from owners).

Splits And Separations

But does the power of the fundamentals always drag the two markets along together? It is not always the case; they often move apart. Before the financial crisis, the freight market appeared somewhat less volatile than today, but that did not always see the markets in sync. Despite more than 20% cargo growth in 2005-06, and the freight market holding most of its ground, the charter rate index slumped by 47% from an all-time high of 172 in Apr-05 to 91 in Dec-06, as super-cycle peak rates proved unsustainable.

The post-downturn period has seen similar instances. The box shipping markets moved into an era of ‘micro’ management of supply (slow steaming, idling and cascading) and this has impacted both freight and charter markets. In both early 2011 and 1H 2015 charter rates rose as freight rates dropped like a stone. In 2011 the freight rate index dropped by 38% to 47 whilst the charter rate index rallied, as operators deployed additional capacity to the detriment of freight rates. But soon after the opposite occurred, and freight rates increased but charter rates dropped back to bottom of the cycle levels where they remained for the next three years.

Re-Coupling…

In the long-term, however, the two spheres do appear to be aligned. What simple inspection suggests, the numbers confirm. In only 33 of the months on the graph (21%) have the markets actually moved in opposite directions (excluding monthly movements of less than 1%).

Let’s Stick Together!

So, the two box markets do move independently at times but they often move in sync and when apart they tend to re-align (what econometricians might call an ‘error correction mechanism’). Perhaps this just confirms that ‘cargo is king’ and the supply side eventually adjusts. Whatever the case, box shipping’s famous couple can’t keep themselves apart for too long. Have a nice day.

SIW1277

During July 2016, the containership fleet reached a landmark 20 million TEU in terms of aggregate capacity. To many it only seems like yesterday when the boxship fleet passed the 10 million TEU mark, back in April 2007. It took less than 10 years to double in capacity to reach the new milestone. Sprightly fleet growth indeed, but how rapid is it when compared to other parts of the world fleet?

Compound Crazy

Albert Einstein once called the impact of compound growth the ‘most powerful force in the universe’, and containership fleet capacity is a great example of this power. Total boxship capacity doubled from 5m TEU in size (in April 2001) to 10m TEU (in May 2007) in 6.2 years, and since then it has doubled in size again from 10m TEU to an astounding 20m TEU across just a further 9.3 years.

This rapid growth of the containership sector is a fairly well known story. In many respects the box sector is still a youthful part of the shipping world; since the inception of container shipping in the 1950s, the fleet has grown quickly from humble origins as trade has flourished. At the same time the fleet has upsized at a phenomenal rate. The average size of containerships in the fleet stood at 1,807 TEU in April 2001 and increased to 2,425 TEU in May 2007. Today, with behemoth boxships of over 19,000 TEU on the water, the average size of units in the fleet is 3,832 TEU, and the average size of those on order is even larger at 8,030 TEU.

Maturing Slowly

In contrast, some other shipping sectors can seem more ‘mature’, growing at a gentler rate. Tanker fleet capacity took almost 21 years to double to reach its current size of 540.9m dwt. In relative terms, the trade is indeed fairly mature, with average growth in volumes of 2.2% per annum over the last 20 years in combined crude and products trade. But interestingly, this is a sector now seeing rapid capacity growth, with an uptick in trade growth in recent years driving tanker ordering. In the last 19 months tanker fleet capacity has grown by 6.5%.

Bulk Bulge

However, the bulkcarrier fleet comfortably illustrates that the boxship sector has not been alone in experiencing rocketing growth. Although the vessels themselves may not have seen the same upsizing as boxships, bulker capacity expansion has been extraordinarily fast in recent times. Astonishingly, it took just 8.6 years from January 2008 to double to its current capacity of 784.1m dwt (though it had taken around 21 years before that to double previously). Nevertheless, bulker capacity expansion has slowed now, as dry bulk trade growth has hit the buffers.

Boom Time

So, the latest instance of a rapid doubling of fleet capacity is not a one-off. The explosion of boxship capacity has indeed been rapid, but in a world where shipbuilding output was hitting all-time highs not long ago, such growth has been a wider phenomenon. The overall world fleet has increased by 55% in dwt terms in the period since the onset of the global financial crisis in September 2008 alone. That’s a robust compound annual growth rate of 5.1%! Have a nice day, Einstein!

SIW1236 Graph of the Week

SIW1100Last Friday saw US retail’s biggest day of the year. “Black Friday” offers tempted shoppers into parting with $57.4bn in the US, followed by more online spending on “Cyber Monday”. That’s a lot of retail activity and the phenomenon is becoming more global. Much of the stock sold is shipped from its location of manufacture by container, so does this help shipping?

Bad Days

Retail spikes like this aren’t a totally new phenomenon, and in any case they haven’t been much help in recent years. Since the onset of the economic downturn, the two key ‘mainlane’ container trades have performed relatively weakly as consumers in the west have remained under pressure. The graph shows monthly year-on-year growth in eastbound Asia-US and westbound Asia-Europe box volumes, reflecting the strength of demand for Asian-made manufactures from consumers in the developed world. Late 2008 and most of 2009 saw a severe downturn in volumes, with retailers destocking rapidly, and most of the time since mid-2011 growth has remained in the doldrums along with the developed economies. Positive growth in 2010 was only really a reflection of how bad 2009 was and overall volumes have seen little growth. Asia-Europe volumes in 2012 were still down 2% on 2008, and Asia-US volumes 1% lower.

Better Days?

However, things might be on the turn. Data on the impact of the last week’s retail trade on box volumes isn’t available yet (and as it happens the US spend on Black Friday itself has initially been reported to be a little down on last year), but recent mainlane volume data has shown a welcome return to positive growth. In June y-o-y growth returned to firmly positive territory on the Asia-Europe lane and followed suit on the Transpacific in July. Across June-October, Asia-Europe trade has been up 8% y-o-y and Asia-US trade up 4%. Having bemoaned the lack of a ‘peak season’ in recent years, carriers may at last this year have seen a surge in volumes during the period in which retailers conventionally stock up ready for the pre-holiday shopping season.

Big World Today

How much help is this? Once upon a time the health of the sector depended on growth on the mainlane trades. These days, due to expansion in the developing economies, and on the north-south and intra-Asia trades, the mainlanes aren’t always the key growth drivers. Volume growth there is only expected to constitute a 23% share of global growth in 2013 (with 39% intra-Asia). However, healthier mainlane trade still certainly helps top up demand growth.

Day to Day

So container transportation connects the world’s producers and consumers, but it’s a big world out there now and retail activity in the developed world isn’t enough to carry containership demand on its own. However, with growth coming back on the mainlanes, further helpful Fridays, Mondays or any other days will be better news for container shipping.