Have carriers failed to adjust to a new normal?

Hong Kong consultant Linerlytica reports that carriers have not adjusted their Asia to Europe capacity as demand has softened, with an expected further boost of 25% to capacity in the trade in the coming weeks.

“Apart from selective void sailings, none of the carriers on the Asia-Europe route are planning any winter capacity reductions. This would jeopardise their efforts to arrest the decline in freight rates despite plans to hike rates by $1,000-$2,000/feu on 1 November after the SCFIS [Shanghai Containerized Freight Index Settled Rates] has already slipped by 62% since July,” said Linerlytica.

Demand is now tailing off in both Europe and the US according to Linerlytica, with the “heavy front-loading of holiday season cargo now in reverse”.

An expected global boost to capacity of around 1m teu by the end of the year will increase capacity on both the Pacific and Asia to Europe trades, with notable changes to trades caused by the Red Sea diversions, which many industry observers believe will continue well into the new year and perhaps longer.

A newbuilding frenzy that began post-Covid has seen a flood of new tonnage arriving in a timely manner as attacks in the Red Sea closed the Suez route to the vast majority of traffic, increasing the number of vessels necessary to maintain weekly Asia to Europe services.

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MDS Transmodal statistics reveal the how service schedules have been met by diverting vessels away from wayport calls in the Middle East and the Indian Subcontinent, with a 53% cut in scheduled capacity. These services have been replaced with direct Far East to Middle East, via Subcontinent services.

Likewise, the pendulum services to the US East Coast have also ceased with freight redirected to the West Coast and overland or via the Panama Canal.

Absorbing tonnage through direct calls has been successful, bolstering rates in the first seven months of this year, however a demand dip and supply increase brings a consequent downward shift in rates.

Shipyards are reporting full orderbooks up to 2027, but ordering appears to be continuing unabated, with Hapag-Lloyd confirming that it is in negotiations to build up to 24 dual fuel ships for delivery in 2028 and 2029, which will “contribute to the further modernisation of our fleet,” said a Hapag-Lloyd spokesman.

London-based shipbroker, Braemar calculates that the requirement to meet carbon regulations could compel owners to slow steam, and that this could have a significant impact on the over-capacity conundrum.

“If slow steaming becomes the thing to do, the burst of newbuilding investment we have seen during the summer of 2024 makes sense. With the current order book and our assumed demolition estimate, we estimate that base case oversupply would average 23% in the six years 2025-2030.

"If we factor in blanket slow steaming (-2.5 knots) as an example, the average overcapacity is reduced to just 3%,” said Braemar.

The broker concluded: “It is plausible that long-term Cape of Good Hope diversions and anticipated mass slow steaming may have propelled the massive investment in container ship newbuildings in 2024.”