Carriers have been dealing with a weak container shipping market across major east-west trades in recent months despite becoming increasingly aggressive about limiting capacity, but going forward, carriers can expect the Asia-North Europe trade in particular to give them a run for their money.
Uncertainty continues to loom over the entire container shipping industry, from an unclear Brexit outcome to question marks still hanging over a potential U.S.-China trade deal and, most importantly, the International Maritime Organization’s (IMO) 2020 sulfur cap. After all, it is still not clear just how much cost carriers will absorb from higher fuel prices due to the regulation, especially considering the little luck they have had in the past in passing down higher fuel prices to shippers.
“A failure to recover the extra fuel costs in full may even result in outright bankruptcies in the container shipping industry,” BIMCO chief shipping analyst Peter Sand said in February.
Carriers blanked more sailings than usual on Asia-North America and Asia-Europe trades around the 2019 Chinese New Year, which began Feb. 5 this year, and have continued to be aggressive in blanking sailings on both trades.
However, spot container rates generally have continued to tumble in recent months, according to composite readings of the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index (SCFI), Drewry’s World Container Index (WCI) and the Freightos Baltic Index (FBX). Despite all three indexes showing a downturn in recent months, they show mixed results on a year-over-year basis as of early March, as illustrated in the chart below.
Since the beginning of March, all three indexes have continued to further decline week-over-week, with the WCI standing at $1,293 per FEU as of March 21, the FBX at $1,280 per FEU as of March 22 and the SCFI at 727.88 as of March 22.
The WCI is a composite of container spot rates on eight major routes to and from the United States, Europe and Asia; the FBX is a composite of container spot rates on 12 global routes between Asia, Europe, North America and South America; and the SCFI measures container spot rates from Shanghai to 13 regions around to globe to give an overall reading.
Bearing the brunt. Despite the current downturn for container carriers, coupled with higher than usual uncertainty, one factor that is for sure is that the Asia-North Europe trade, in both directions, will be a challenging area for carriers to make a profit for an array of reasons, but particularly because North Europe is experiencing slower economic growth than the world average.
The chart below illustrates that the International Monetary Fund’s (IMF) latest world economic outlook projections released in January forecast global growth remaining relatively stable each year between 2017 and 2020. However, growth in the euro area took a sharp downturn between 2017 and 2018, according to IMF estimates. Meanwhile, the United Kingdom’s global growth, which the IMF admitted is highly uncertain and dependent on the Brexit outcome, is expected to total 1.5 percent this year. The IMF had said its projection for the U.K. was based on a scenario in which a Brexit deal is reached in 2019 and that the U.K. “transitions gradually to the new regime.”
The euro area, also sometimes referred to as the eurozone, is a monetary union of 19 of the 28 European Union member states: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
In the euro area, the IMF said in January that “growth rates have been marked down for many economies, notably Germany (due to soft private consumption, weak industrial production following the introduction of revised auto emission standards and subdued foreign demand); Italy (due to weak domestic demand and higher borrowing costs as sovereign yields remain elevated); and France (due to the negative impact of street protests and industrial action).”
Germany is dealing with a fall in overseas demand — and therefore exports, online freight forwarder iContainers explained in March. “As the European Union’s largest economy, Germany is responsible for around one-fifth of the European bloc’s overall GDP,” iContainers said. “For nearly a decade now, it has been enjoying economic growth. But it seems the tide may just be turning.”
Jack Allen, senior Europe economist at Capital Economics, said, “If you look at Germany across 2018, we’ve seen a pretty broad-based slowdown in growth. We’ve seen household consumption slow, we’ve seen business investment slow and we’ve seen export growth slow. What’s particularly worrying is that the early signs for 2019 suggest that a strong rebound is unlikely.”
Meanwhile, Clarkson PLC (Clarksons) in March said that container throughput expansion in 2018 on the Far East to Europe route “was limited in part due to declining import levels to the U.K. and Germany and a sharp drop in volumes into Turkey.”
Needless to say, all signs point to Europe’s economy tanking and with this comes lower container volumes. With more boxes shipped between Asia and North Europe than Asia and North America, the Asia-North Europe route will feel the larger pinch.
Clarksons said in March that global trade volumes are estimated to have totaled 201 million TEUs in 2018, up 4.5 percent year-over-year.
However, data from Container Trade Statistics (CTS) illustrated that 16.18 million TEUs moved from the Far East to Europe (including the Mediterranean) in 2018, a mere 2.0 percent year-over-year increase. CTS data closely correlated with the Japan Maritime Center’s results, which found that container exports from East Asia to Europe (including the Mediterranean) totaled 16.21 million TEUs in 2018, up just 2.2 percent from 2017. JMC also found that container exports from Europe (including the Mediterranean) to East Asia totaled 7.71 million TEUs in 2018, down 2.3 percent year-over-year.
Adding fuel to the fire for the Asia-North Europe trade in particular is the IMO’s sulfur cap. The consulting firm AlixPartners released a report in February that said, “According to our analysis of large carriers that publish bunker adjustment factor (BAF) rates (tracked by maritime research consultant Drewry), carriers plying the Asia-Europe route in 2018 would have had to increase their BAF rates by 40 percent, or $270 per forty-foot equivalent unit (FEU), to achieve the same financial result.” However, carriers working the eastbound transpacific route would have needed to increase their BAF rates by 33 percent, or an additional $150 per FEU, AlixPartners said.
By the numbers. The WCI, FBX and SCFI all show that spot container rates from Asia to North Europe have been drastically declining over the last several weeks, while on a year-over-year basis, the FBX and SCFI are showing a decline and the WCI is showing a very small increase of just 1 percent. Although the SCFI does not track rates on the eastbound leg from North Europe to Asia, the WCI and FBX both show a year-over-year decline in rates from North Europe to Asia. However, while the WCI shows rates from North Europe to Asia have been declining over the last several weeks, the FBX shows an increase.
Despite generally weak rates on the Asia-North Europe trade, average containership size on the trade continues to increase, as illustrated in the chart below, which was built using BlueWater Reporting data. As of the end of February, average containership size on the trade totaled 14,465 TEUs, up 21.1 percent from four years prior, but only a modest increase of 2.6 percent from a year prior.
“Since 2011, the compound annual growth rate on the westbound Asia-North Europe trade is a miserable 1.3 percent, which looks worse when considering the huge capital investment made to upgrade the route with ultra-large container vessels (ULCVs) of 18,000 TEUs and above,” shipping research and consulting firm Drewry said in its March 3 Container Insight Weekly newsletter.
A glimmer of hope? Despite the Asia-North Europe trade being a challenging market for carriers, there are some signs that carriers are taking measures on the trade to reverse this trend and thwart overcapacity issues.
Drewry said that carriers, for the first time, are phasing some of the ULCVs from the Asia-North Europe trade onto the Asia-Middle East and Asia-Mediterranean trades. Drewry said the OCEAN Alliance’s ME5 loop and the 2M Alliance’s AE11/Jade loop are seeing some of these ULCVs.
Ironically, the OCEAN Alliance, which BlueWater Reporting shows deploys the most capacity on the Asia to North Europe trade, is slated to launch a seventh loop to the trade as part of its new service network that takes effect in April. However, none of the OCEAN Alliance’s members would provide comment on how much this seventh loop will increase its capacity on the trade.
The chart above, built using data from BlueWater Reporting, shows each alliance’s current presence on the Asia to North Europe trade, based on weekly deployed capacity (TEUs).
In addition to moving ULCVs from this key trade to other routes and being more aggressive in blanking sailings, it also appears that the era of trying to be the latest carrier to order the largest vessel is coming to an end. Carriers instead are more focused on branching out to offer other logistics services and preparing for the IMO’s sulfur cap.
Clarksons said in March that containership capacity expansion totaled 5.6 percent in 2018 and is expected to total around 3 percent in both 2019 and 2020.
“On the supply side, despite a steady flow of feeder ship ordering, at an aggregate level, the ordering of newbuildings remained relatively moderate with 1.2 million TEUs contracted in 2018; the orderbook now stands at a historically low 13 percent of fleet capacity,” Clarksons said. “Liner company consolidation has continued, and for operators and owners alike, fuel economics are now firmly in play.”
Although carriers have taken measures to restrict capacity, the outlook for carriers on the route still appears generally grim as these steps don’t change Europe’s economic downturn and the fact that the trade will be especially hit hard from the sulfur cap. And although ocean-going vessels transport the vast majority of cargo on the trade and will continue to do so, overland transport is on the rise.
Going forward, carriers will want to continue to be aggressive about blanking sailings on the trade to help with overcapacity and potentially slow steam more to save money on fuel costs, while shippers will want to pay close attention to these measures, which could delay their shipments. But at least they can capitalize off of the trade’s low spot rates for the time being.