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Structural overcapacity adds to boxship woes warns Drewry

Structural overcapacity adds to boxship woes warns Drewry
Economies of scale have led to structural overcapacity in the container industry, while an inelastic demand curve means that falling rates have a limited effect on the overall demand curve.

“Even if rates are down, demand is increasing at its own pace,” Shailesh Garg, general manager at Drewry Maritime Services told the 2nd Mare Forum 2015 in Dubai yesterday.

"The key challenge is the orderbook, which is scaring everyone. Despite low freight rates, new orders are taking place, adding to the woes of the industry."

Garg said 2015 would be a critical year, with containership capacity expected to increase by over 7%. He said nearly 200 ships with capacities of 8,000-plus teu were scheduled to be delivered in 2015-16. The 8,000-plus teu fleet was growing at 21% and 23.3% respectively in 2014 and 2015, he said. The orderbook reached over 3.3m teu by the end of 2014, or 18.3% of the fleet. "Five major carriers, Maersk, MSC, CMA CGM, CSCL and UASC, will soon be at the 18,000 teu level,” he said.

World container handling is estimated at 677m teu in 2014, an increase of 5.0% over 2013, with similar growth of 5.3% and 5.5% expected in 2015 and 2016 respectively. Port to port traffic is expected to reach 185.4m teu, an increase of 5.2%.

Drewry estimates put 2013 Transpacific containerised seaborne trade at 23.1m teu, Europe-Far East at 20.4m teu, Far East-Mid East to South Asia at 12.8m teu and Transatlantic at 6.7m teu. Garg said Far East to Middle East and South Asia routes had grown at a CAGR of 13.4% in the period 2007-13, while Europe-Far East and Transpacific had grown at only 1.6% and 1.9% respectively.

The drive for economies of scale through larger ships is leading to overcapacity, slow demand growth and pushing back supply-demand equilibrium. This has put industry finances in a parlous position, Garg believes, with earnings fragile, and carriers burning cash - a situation that cannot last much longer. Low newbuilding prices are prompting new ordering when consolidation is needed.

The expected recovery in 2017 is about adapting to change and reducing costs, than a real possibility of matching supply and demand, he said. The new operating alliances are a positive for the industry, but will bring temporary chaos to scheduling. Freight rates will decline next year and the new low sulphur fuel regulations will be a challenge to all industry stakeholders.

“The big question is: what is recovery? The industry has gone through different structural changes and today it is not just about recovery of the freight rate. It means we are struggling to assess what the industry wants. There are a [few] questions: is reducing the cost recovery? Is supply-demand recovery? Are increases or improvements in demand recovery?” Garg asked.

“There are three or four parameters in the industry which people are working on."