Of market imbalance and ultra large container ships

Even before this crisis, the container shipping industry was saddled with overcapacity carried over from the previous decade, a problem that will rise again due to the demand fallout from the Covid-19 pandemic.

To understand the challenges the container shipping market will face in the coming years, it is useful to provide some context and take account of market developments over the past decade.

In only three years of the past decade, demand outgrew the fleet, giving a much higher supply growth than that of demand: the TEU capacity of the fleet grew by 75.6% whereas demand measured in volumes was up 46.1%. This imbalance left the container shipping market in a worse condition at the end of the decade than at the start.

Volumes grew year-on-year throughout the decade, though the growth rate came down considerably from the start of the decade. The strongest growth came in 2010, at 13.7%, while the lowest growth was experienced in 2019 at just 1.8%. For comparison, in those same years, the fleet grew by 8.5% and 3.3% respectively.

On the supply side, the overriding story of the past decade in container shipping is that of the ever-increasing ship sizes in pursuit of economies of scale. At the start of the decade, the largest container ships were officially a series of three MSC sister ships with a capacity of 13,800 TEU. However, EMMA Maersk was in fact the largest. Although its capacity was reported at 13,500 TEU when delivered in 2006, it actually has a capacity of 17,816 TEU. (Elsewhere in this issue there is a report on 24,000-TEU HMM Algeciras.)

At the end of 2019, the largest ships were a series of 11 MSC ships with a capacity of 23,700 TEU. The continued growth of these ships, not only in size, but also number, reflects the increasing use of the hub and spoke network model, with owners focused on expanding their feeder and ultra large container ship (ULCS) fleets, while the middle ship sizes (3,000 – 14,999 TEU) have become less popular.

The increasing container ship sizes have led to investments in ports, cranes and maritime infrastructure around the world to allow the facilities to accommodate these larger ships. Examples include expanding the Panama Canal and lifting the Bayonne Bridge in New York/New Jersey, which have opened more US east coast ports to these ships. Even these expansion projects are not always enough to accommodate the fast-pace increases in container ship sizes: after lifting the Bayonne Bridge, it still only fits a ship up to 18,000 TEU.

Over the 10 years, the fleet grew by 75.6% to reach 22.96M TEU by the end of 2019. The share of the fleet capacity made up by ULCS (15,000 TEU+) rose from 1% to 13%.

Freight rates stagnated towards the end of the decade

Both contract and spot container shipping rates peaked at the start of the decade with the Shanghai Containerised Freight Index (SCFI) and China Containerised Freight Index (CCFI) averaging 1,362.4 and 1,132.8 in 2010, respectively. The SCFI covers spot rates for exports from Shanghai, whereas the CCFI also includes longer-term contracts from a broader range of 10 Chinese export ports. Both bottomed out in 2016 and recovered in 2017, but from then to the end of the decade, freight rates stagnated. In 2019, the SCFI was 2% higher than in 2017, whereas the CCFI had fallen by 0.5%. Compared to 2010, the indexes had fallen by 40.5% and 27.3% in 2019.

The deliveries of up to 30 ULCSs a year in the latter part of the decade has left a shadow of overcapacity over the market, limiting the potential growth for freight rates, and highlighting the importance of cost cutting. The fact that many of these ULCS are very limited as to which trades they can be deployed on due to their size, means these trades are faced with continuous additions of unneeded capacity and the smaller neo-Panamax and intermediate container ships are pushed onto secondary trade lanes.

The past decade brought increasingly challenging market conditions with more cutthroat competition, overcapacity, and greater consolidation of the main carriers. Major cost reductions were leveraged through the unrelenting pursuit of economies of scale.

But as nominal fleet growth exceeded demand growth in most of the years, the freight rates came under mounting pressure, eroding operating margins of container carriers.

This comment is an edited version of a longer piece that originally appeared on the BIMCO homepage. Peter Sand is chief shipping analyst at BIMCO