Ocean freight overcapacity fears ‘over-hyped’

Predictions in recent months that new containership deliveries this year would flood an ocean freight market already experiencing overcapacity were “over-hyped”, according to new analysis by Drewry, which now believes recent vessel delivery deferrals mean demand growth will slightly exceed new containership deliveries in 2018.

Drewry acknowledged that last year, like many other analysts, it had expressed concerns about overcapacity in 2018, based on the orderbook at the time, even after including forecasts in its analysis last year for slippage and scrapping, noting: “Such was the weight of the 2018 delivery schedule in October 2017 that at the time we predicted supply growth would outpace demand, resulting in a lower reading to the Drewry Global Supply-Demand Index.

“However, since then the orderbook has undergone some subtle manoeuvres, which have had a positive effect on our supply-demand equations. While the sum total of confirmed new capacity due to arrive through 2022 hasn’t much changed, the delivery breakdown by year has been significantly altered as a consequence of owners delaying a number of deliveries.”

This “smoothing process” means that as of 1 January 2018, the unadjusted orderbook schedule for 2018 shrank by approximately 150,000 teu to stand at 1.46 million, the container shipping analyst noted. Based on deliveries in the first quarter of 2018 and what is scheduled for the remainder of the year (as of 18 April), Drewry now expects the full-year delivery total for 2018 to be in the region of 1 million to 1.2m teu.

“In essence, over the space of six months, owners have pared back the 2018 total by as much as 600,000 teu,” it added. “If our forecast is correct, the annual delivery total for 2018 will be broadly unchanged from 2016 and 2017, which marked a significant slowdown compared to the previous six years.

“Crucially, the new supply growth forecast for the current year is lower than demand, meaning we expect the global supply-demand index to nudge upwards this year. The market will still be over-supplied, but not catastrophically so, and certainly showing signs of improvement.”

Drewry noted that even though the global supply-demand index for the year as a whole was expected to be higher, it will start off lower – that is, the year will start in a greater state of overcapacity – “due to the top-heavy delivery schedule in 2018”. It added: “The timing could not have been worse for carriers, as it created negative sentiment for the crucial annual Asia-Europe and Transpacific contracting seasons.”

But the effects will vary on different trades, Drewry noted, explaining: “While we are anticipating a more benign overall supply scenario for 2018, it would be remiss not to mention that pressures will still exist and vary in severity trade by trade as a consequence of the growing share of Ultra Large Container Vessels (ULCVs) of 18,000 teu and above in the orderbook. ULCVs, with their limited deployment options, made up just 5\% of deliveries in 2013 in terms of teu, but have since risen to one-third by 2017. Based on the current orderbook, the upwards trend will intensify over the next few years.”

Looking further ahead, Drewry said the low-level newbuild contracting of 2016-17 meant that there was “not much currently scheduled for delivery post-2019, most of which comes from slippage caused by deferrals from earlier years. Based on Drewry’s current projections, there is a clear need for extra newbuilds for 2020 onwards to satisfy the expected cargo growth.”

For the next few years, beyond 2018, it noted: “At the moment, Drewry is of the opinion that new orders will be appropriate to demand needs, thanks to a combination of financial constraints and greater capex discipline brought about by M&A, although we recognise that there are major risks to that assumption, primarily from state-backed entities that can play by their own rules.”

It concluded: “The reality of supply growth in 2018 is far less frightening than it was previously. We expect new ordering activity to rise off the floor, but stay at a level that incrementally improves the supply-demand balance over the next five years.”

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