After the improvements of 2017, container shipping has had a bumpier ride in 2018. Forward with Toll spoke with Trevor Crowe, Director at Clarksons Research, to get an insight into what 2019 might hold.
“2017 was a year of improvement, and 2018 thus far has been quite mixed.”
Broadly speaking, Clarksons Research’s reports show the box freight market has been volatile and mixed, and containership earnings have improved before easing back a little in the second half of the year.
It’s no secret the 2018 freight market has been volatile. The first quarter saw mainline east-west freight rates lose a lot of ground, with some of the losses gained back in the second quarter. The third quarter saw divergence; a strongly performing Transpacific, but a much weaker Far East-Europe route.
In terms of freight rates, it’s been a mixed year. Going into 2018, the liner companies were hoping for a little bit more improvement than we’ve had and that hasn’t quite come through.
This movement has been against a background of rising fuel prices. Oil prices have been significantly higher in 2018 than in 2017, placing container shipping companies under quite a bit of pressure from fuel costs.
Containership earnings have made improvements in 2018, on top of the gains made in 2017. The Clarksons Research containership charter market index has risen up to 61 points, on top of some pretty significant gains last year but equally it has eased off a little bit since the summer.
“It’s been an interesting year, things have moved forward but it has been more mixed than people might have thought and that’s largely down to a mixture of trends on the supply side and the demand side.”
So, what have been the trends in supply and demand driving volatility?
“Demand has been positive this year. Our expectation is that global container trade this year (2018) will have grown by around 4.5-5%. That’s reasonably healthy growth but it’s been quite mixed across the different trade lanes.”
The main lane East-West trade will likely have only grown up to 2% in 2018 and the Far East–Europe trade has essentially been flat in terms of volume. It’s the Transpacific route that has been the star, growing by over 5% at the end of the third quarter.
Intra-regional trade, specifically intra-Asia trade has performed well, with 5-6% growth on intra-Asian routes. Regional trade has performed more strongly than the larger East-West trades. North-South trade has been growing robustly. “It will grow about 6% this year, which is a very strong performance.”
Although all this growth sounds very promising and positive, there are some risks brewing.
“We have a number of issues, particularly the trade war between US and China, and some underperforming economies in Europe. The risks to the demand side are definitely building.“
On the supply side, total containership capacity will have grown by just under 6% in 2018. “Unlike last year, where the trade growth was significantly ahead of capacity, this year the balance has been a little tight. In fact the supply side looks like it will outpace the demand side in 2018. That’s what has made this year a little more mixed.”
However, there is not as much idle capacity today, “At the start of 2017 about 7% of the container ship capacity was sitting idle. Today that figure is more like 2%.”
It has been a solid year for new ship deliveries, while the recycling of old ships has slowed dramatically. “2018 has seen continued deliveries of big container ships, including a number of megaships of over 20,000 TEU. We are projecting that by the end of 2018 we’ll have had about 1.3million TEUs of deliveries this year. That’s pushed the fleet growth up,” he says.
So, 2018 has proven to be an interesting and mixed year of growth and volatility. The questions is, where does all this activity leave us for 2019?
“From an analyst’s point of view, there’s more uncertainty to track than there has been for some while.”
Clarksons Research believe that supply and demand will resume its rebalancing next year. Their forecast is for “continued gradual rebalancing, with a decent level of trade growth and supply growth definitely set to slow (back to below 4% next year).”
The research points to risks and uncertainties that have built up quite a lot in the last six months. The US-China trade war looms over the Transpacific trade (after such a strong year), European economies are fragile, and the maturing of China’s economy has the potential to impact trade patterns.
The US-China trade struggles are the most important uncertainty factor to understand, according to Clarksons Research, “From our estimate, over 5% of global container trade could be affected by tariffs but of course we don’t know exactly what the impact will be.“ This situation needs to be watched closely, it has the possibility to affect investor sentiment and possibly escalate to a wider trade war.
Looking on the brighter side, Clarksons Research are positive about China’s Belt and Road initiative. “It’s longer term than just 2019, but we feel that the Belt and Road Initiative is building trading infrastructure for the twenty-first century which could support trade volume growth.” There are further positive drivers for trade growth as developing economies continue to form a larger part of the trade matrix.
The research highlighted the impact and lack of consensus in the industry around the IMO 2020 sulphur emissions cap. Given the potentially higher price of compliant fuel, reduced vessel operating speeds, increased demolition and the time spent by ships out of service as they retrofit new technology could all impact the industry’s supply-demand balance going forward.
Further to these elements, the sale and purchase of containerships remains active and that is likely to continue into 2019. The impact of the significant consolidation that’s happened in the industry in the last few years should also be tracked closely in 2019 and beyond.
Looking beyond 2019 and into the longer term, Crowe believes the use of technology in general, and in particular production technologies like 3D printing, will impact container shipping and supply chain patterns and the industry as a whole, and will also need to be tracked closely by industry observers.