Calls Mount to Savagely Cut Ship Capacity

 29 Feb 2016     Cargo Volumes and Throughput, Carriers, CMA CGM, Maersk, MSC, Finance, Global Economy/Trade, Going Places, Mega Ship Ready, Ports

Drewry has argued in its latest Container Insight Weekly that carriers need to intensify their capacity management tactics in 2016 if they are to reverse the trend of costly overcapacity in the industry.

In 2015 carriers were close to full with ship utilisation on headhaul East-West services averaging 87% over the course of the year. This was down on 93% ship utilisation for 2014.

Considering the seasonal peaks in volumes, carriers did a reasonable job of matching supply with demand on a monthly basis.

The delicate balancing act was previously achieved through a combination of tactics designed to suppress supply-side inflation.

On top of the now entrenched slow-steaming, carriers intensified the amount of void sailings (when ships continue sailing in order to maintain position but do not load or discharge at ports), suspended or merged services, cascaded ships into other trades to make way for newer, bigger vessels and as a last resort were forced to lay-up many more of those assets as the year progressed.

In the Asia-North Europe trade alone there were around 230 void sailings in 2015, which reduced the annual on-way capacity count by approximately 910,000 TEU, or 8% of what it would have been without any blanked voyages.

Westbound Asia-North Europe ship utilisation would have been 7 percentage points lower without missed sailings at 81% instead of the somewhat artificially inflated 88% it actually was.

The effectiveness of void sailings varied in different months but at its most successful in August it boosted westbound Asia-North Europe ship utilisation by 11 percentage points, helping sustain a big spike in freight rates achieved in July.

The Ocean Three (CMA CGM, CSCL and UASC) and G6 Alliance carriers (APL, Hapag-Lloyd, Hyundai, MOL, NYK, and OOCL) were the biggest practitioners of void sailings in the Asia-North Europe trade last year, removing 290,000 TEU and 270,000 TEU in annual one-way capacity respectively.

The other two alliances operating in the trade, 2M (Maersk Line and MSC) and the CKYHE Alliance (Cosco, K Line, Yang Ming, Hanjin and Evergreen) were more restrained, culling “only” 160,000 TEU and 190,000 TEU, respectively.

Drewry contend that this tells us that all carriers were feeling the pain, but possibly at different levels of intensity. Deploying larger ships on this route, and therefore having lower OPEX than its rivals, the 2M carriers theoretically have a bigger safety net that enables them to operate for longer in a low-rate environment before they too have to consider modifying capacity in some way.

Despite carriers’ best efforts to curb the supply-side growth, it wasn’t enough and spot market freight rates plummeted to non-compensatory levels by the end of the year. Drewry’s East-West Freight Rate Index, as published in the Container Freight Rate Insight, fell back by 26% on average in 2015, while the Asia-Europe Westbound Rate Index fell even further by 42%.

The even worse news for lines is that they will have to go deeper again in 2016. With only minimal demand growth anticipated, carriers will need to be even more creative at hiding the 1.3 million TEU worth of newbuilds scheduled for delivery in 2016, the majority of which are destined for the East-West trades.

Some capacity will be removed via scrapping as it always is while some of the pressure from East-West services will be passed on to North-South trades, although the latter’s ability to absorb ships is lessening.

The Drewry View

Carriers will need to intensify the cascade of ships, missed sailings and lay-ups in order to raise utilisation to levels that could propel rates to profitable levels.