The Asia-Europe trade route is bound to experience further rate turmoil during 2017 as carriers from three new alliances are set to phase additional vessel capacity into the trade starting from April, according to Alphaliner.
The three new alliances, including 2M-HMM/HS, OCEAN and THE Alliance, will provide 17 weekly strings between Asia and North Europe, one more than currently offered by the four existing alliances 2M, G6, CKYE and O3.
With these changes, the total weekly capacity to North Europe will increase by 9.6%, compared to the services offered now.
Alphaliner said that the biggest increases are to come from the 2M, which will not only fully upgrade its existing loops to the 18,000-20,000 TEU scale, but also mount a sixth weekly string from April. The 2M carriers’ average capacity on the Asia-North Europe route will thus increase by some 23%, from 83,500 TEU to 103,000 TEU.
The 2M's capacity increase is partly motivated by the extra volumes to be brought by HMM and Hamburg Süd, who will take about 6,000 TEU and 4,000 TEU, respectively, of weekly slots on the alliance's services from April 1. These slots account for 12% of the capacity increase, while Maersk and MSC will still see their net weekly capacity increase by some 11%.
The two other new alliance groups – OCEAN and THE Alliance – will offer six and five weekly strings, respectively, with a combined weekly capacity of 155,000 TEU. They will provide the same total number of weekly sailings as that offered currently by the G6, CKYE and O3, while total weekly capacity is increased by about 9%.
Sulfur regulations are not getting a lot of attention from shippers at present but that should change given that the cost impact of 2020 is expected to dwarf that of 2015, according to Norwegian shipping company Wallenius Wilhelmsen Logistics (WWL).
The decision by the International Maritime Organization (IMO) to set 2020 as the start date for the 0.5% global sulfur cap has been widely welcomed for demonstrating that shipping and its regulator are prepared to make tough choices. However, the IMO has set the shipping and refining industries a tough technical challenge of producing and sourcing the fuel necessary to meet the 0.5% sulfur maximum, WWL said.
The far greater challenge is what happens when the resulting costs become properly understood.
"As we have seen from the experience of Emission Control Areas (ECAs), these are not costs the industry will be able to absorb," said Anna Larsson, Global Head of Sustainability at WWL.
As explained, a pattern is emerging, similar to that seen in the lead-up to the 0.1% sulfur limit of 2015 within ECAs. The industry conversation was dominated by technical considerations of how carriers would manage.
Fuel accounts for between one and two-thirds of the total cost base for most shipping companies and some reasonable assumptions about the premium compared to heavy fuel oil put the increase at anywhere between 40-70% for low sulfur fuel.
As such it is hard to avoid the conclusion that even if shippers have not felt the effects of sulfur regulation until now, they are more likely to feel it in 2020, Larsson further argued.
"One of the biggest challenges leading up to 2020 is the uncertainty: we simply don't know what kind of fuel or other compliance options will be available or what the cost will be," Larsson stressed.
"To handle this uncertainty, we have chosen to spread the risk and increase flexibility. The WWL 'four-stream' approach accepts that there will not be a one-size fits all solution."
From a shipper perspective, the worst situation would be working with a carrier who doesn't see what the fuss is about and has done nothing to engage with the issue.
Vessel owners that simply "wait and see" not only put shippers at a disadvantage but also increase the risk of supply chain disruption.
Starting the conversation early means having the best possible chance of mitigating the regulatory impact, Larsson concluded.
The global marine freight industry is forecast to return to 2014 levels by mid-2019 and hit a value of about US$210bn by 2021, according to MarketLine.
"The recovery in the industry is expected to be fueled primarily by a return of global demand as oil prices increase, and while it will take some time for the industry to reset to pre-2015 levels, the shrinking of industry value is short-lived. The players who survived 2015 are likely to have learned from this episode and to incorporate greater efficiency and cost-saving mechanisms in their businesses," explains Tom Hawthorn, Analyst at MarketLine.
The industry had been suffering from a negative compound annual growth rate (CAGR) of 3.3% between 2012 and 2016 amid an increasing oversupply and a collapse of global demand.
The economic growth slowed across most of the world over this period, particularly in China, which has recently been the source of much consumer demand. This resulted in a fall in demand for transportation services in general, which forced prices down and led players to invest in their capacity to keep costs low.
"Given how old and well-established the industry is, it is a wonder that major players did not anticipate this situation. Freight prices have been declining for several years, and rather than tightening operations to cut costs, players have decided to invest in capacity increases.
"Of course, costs are now lower per unit than they once were, but it makes little difference as few firms are managing to fill their ships. The important thing is that increase in supply relative to demand has resulted in greater downward pressures on prices, forcing many firms to operate below cost level," added Hawthorn.
Spot container freight rates from North Europe to China have hit a four-year high as they jumped by 45% last week, according to shipping consultancy Drewry.
The market reading on the route from Rotterdam to Shanghai came in at US$1,076 per 40ft dry container on March 9, from US$740 registered a week earlier.
"Our sources reported that ships are currently full and that carriers have demanded much higher rates – only some prior rate agreements remain in place," said Philip Damas, head of Drewry's logistics practice.
Drewry informed that it is "highly unusual" for the route from Europe to Asia, where vessels normally have load factors of less than 70%, to see such spikes in rate levels and capacity shortages.
The reason for such an increase could be the capacity crunch, boosted by cancelled sailings in China following Chinese New Year, which has now reached Europe.
Five of the EU's approved recycling yards have decided to join forces as they entered into an agreement to form the European Ship Recyclers Group (ESR).
Namely, the French Port of Bordeaux , Belgium-based Galloo, Smedegaarden from Denmark, Dutch Scheepssloperij Nederland and Spain's DDR plan to operate under the flag of the International Ship Recycling Association (ISRA).
"Our first target is to create awareness of the recycling capacity in Europe which today is over a million ton," said Peter Wyntin, ESR Chairman.
"We have to ensure that our member yards are on the top of the ship-owners' list for dismantling their ships. Our message is a clear one. If we can handle them let's keep the EU flagged ships in Europe," added Wyntin.
The European Ship Recyclers Group, which has an aim to unite all the green European recycling, will speak as one voice towards the European Commission which is in charge of implementation of the new EU Ship Recycling Regulation.
A representative from the NGO Shipbreaking Platform said that the move to raise awareness of existing best practice is "a very welcomed development," which highlights the fact that there is capacity in Europe to recycle ships.
The agreement comes less than three months after the European Commission (EC) adopted the first version of the European List of ship recycling facilities.
In December 2016, the EC said that demolition yards included in the list are located in Belgium, Denmark, France, Latvia, Lithuania, the Netherlands, Poland, Portugal, Spain and the United Kingdom.
The first 18 shipyards would have exclusive access to the recycling ships flying the flags of the EU member states, according to the EC.
Yards in third countries also submitted applications, however, the EC earlier said that it will decide on their inclusion in the list in 2017.
A record number of 450 OSVs will be delivered this year, showed VesselsValue data.
At present, there are 456 OSVs on order worldwide, according to VesselsValue.
As the container shipping industry continues to be plagued by the same challenges since the breakout of the 2008 financial crisis, the outlook for global container carriers remains grim at the start of 2017, according to consulting firm AlixPartners.
Sluggish demand levels are exacerbating supply-and-demand imbalances, while mega vessels continue to join the growing global fleet.
In addition, events like Brexit and the new US administration's policies threaten to add insult to injury as they inject even more uncertainty into the future of global trade.
Yet, according to AlixPartners, hope remains for the shipping industry as the fourth quarter of 2016 saw a surge in rate levels on major East-West trades.
What's more, Hanjin Shipping's bankruptcy at the tail end of peak season helped create a rare seller's market that lasted through the close of 2016.
"Although carriers will struggle to improve their financial performance this year, they can take clear steps to shore up balance sheets in this difficult environment," said the consulting firm.
Carriers will face some hard decisions in 2017. As they have already taken steps to relieve their financial woes, including slashing CAPEX and OPEX and stepping up scrapping, the companies should continue to drive down costs through effective post-merger integration and fleet rationalization activities that can bring supply and demand back into balance.
Fortunately, spot rates have improved in the wake of the Hanjin bankruptcy, which carriers must maintain at the very least.
The collapse of South Korean shipping company Hanjin Shipping in late-August 2016 was "a wake-up call" for the entire ocean transportation supply chain and there is a number of lessons to be learned from it, William P. Doyle, Commissioner with the US Federal Maritime Commission, said this week at 2017 TPM Conference in Long Beach, Calofornia.
As a consequence of the bankruptcy of the world's seventh largest carrier, more than USD 14 billion in cargo was stranded at sea and Hanjin ships were scattered all over the globe at anchor or just outside territorial waters.
Chassis in the US were scarce because the empties could not be taken off the trailers. Exporters couldn't get their goods out of terminals to rebook onto other ships. This went on and on and up and down the supply chain costing tens-of-millions of dollars in additional losses to land-side operations, according to Doyle.
"Shippers and carriers need to work in the direction of providing safeguards. It is so important that this does not happen again. Companies may fail, but the responsibility lies with everyone, at least to the extent that we do not have the damage that occurred post-Hanjin," Doyle pointed out.
Doyle said that things could have been done differently as the South Korean government pulled its support funding and let Hanjin fail without any advance notice to the international community of government and industry.
"We are seeing once again government-financed entities stepping in to prop-up liner companies. These include the South Korean-supported Korea Shipping Company, Korea Development Bank, Export-Import Bank of Korea, and the Korea Asset Management Corporation. We are also reading about the National Development Bank of the Taiwan Government and Taiwan’s Ministry of Transport and Communication," he said.
"My concern is what is the breaking point for a government to back-out and leave a liner company broke. We've seen this before. Indeed, it was the Korean Development Bank that backed away from financially supporting the liner company, and once that happened, it was over," Doyle added.
In the future, safeguards will be needed, according to Doyle. Upcoming new alliances should be jointly responsible for their partner lines.
"I firmly believe that if you are going to join an alliance it is the responsibility of the alliance members to ensure the cargo gets where it needs to go. If a carrier company fails and that carrier is party to an alliance, the cargo carried on the failed company's ships may only equate to one-third of the container volume carried. The other two-thirds of containers may belong to the other carriers in the alliance. So, it is essential that you all take responsibility," the FMC Commissioner explained.
"The responsibility is to get the ship into port and get it unloaded, get the empties on board and get the ship back out to sea. The industry needs to investigate options such as insurance contracts or pooled funds to protect shippers from the fallout of a carrier collapse," Doyle said, adding that there may be a problem with funding mechanisms which need to be solved.
Doyle further said that the US was the first country to put commerce first after a federal judge in New Jersey ordered that Hanjin ships could not be arrested or seized. The order allowed vessels to enter ports and be unloaded. However, due to the fact that marine terminals in the US are privately operated, ports did not allow Hanjin ships into port if there were no funds to unload the ships and otherwise pay for terminal services.
In the end, it was the Korean government that had to pay. At the direction of South Korea, the Korean Development Bank or other directed entities would deposit millions of dollars in banks around the US to be used as funds to unload vessels. However, a couple of months passed until the funds were cleared.
"Hanjin was carrying the cargo not only of Hanjin but of the other alliance members of CKYHE as well. Everyone suffered. Wouldn't it have been less caustic for the alliance to insure against such a catastrophe to protect all alliance members?" the FMC Commissioner asked.
"You all in the supply chain need to find a way to speak with one voice on the importance of the entire industry. On world trade, the entire supply chain can do better talking about your importance — from carriers to the ports, to the terminals, to port authorities, to labor, truckers, importers, exporters and distribution centers," Doyle concluded.
Following the lifting of sanctions against the Islamic Republic of Iran in early 2016, seaborne demand for Iranian crude has more than doubled, according to a report released by VesselsValue.
In the past five years, the greatest demand for Iranian crude came from China, Japan and South Korea, respectively.
Excluding the Iranian domestic trade the most journeys of crude were made to China with 105 journeys recorded in 2016. Next was India at 85 journeys and this was followed by the UAE at 58 journeys.
Shipments last year were made using VLCC, Suezmax and some Aframax tonnage. China, India and UAE have always been stalwart importers of Iranian crude, VesselsValue informed.
New players in the mix following the removal of sanctions include France with 21 journeys in 2016, while Italy took 15 shipments, Greece fourteen and Spain thirteen shipments.
"It is no surprise that historically Itan's national tanker line NITC is the largest provider of tonnage. In 2015 companies operating on the trades out of Iran came from a very different demographic to after the sanctions," VesselsValue said.
Besides NITC, top operators in 2015 included COSCO, Idemitsu, Irano Hind, JX Ocean and K Line. This group changed in 2016 to begin to include owners from Greece and Belgium.
The influx of Greek owners has also significantly increased the number of Suezmaxes on the trade rising from 15 to 81 vessels employed.
In the face of the Organization for Petroleum Exporting Countries' (OPEC) cuts, Iran has increased production over January by over 50,000 barrels per day. And with shipments almost doubling, Iran is regaining considerable market share.
At the start of February, the US President Donald Trump announced new sanctions on Iranian and Chinese interests following a missile test by Iran in January.
"Tensions are hot between Iran and the US and any further provocations from Iran could find their crude export programme curtailed once more," VesselsValue said.
Very large crude carrier (VLCC) rates on the AG/Japan route tumbled by nearly w10 points within a day to w60 on Tuesday, according to Ocean Freight Exchange (OFE).
The drop comes on the back of S-Oil placing its tanker Australis on subs for an AG/Onsan run at w54.75, as charterers "went for the jugular," with at least 4 older vessels fixed within the range of w55-w58 for an AG/East voyage.
"We believe that VLCC rates will remain depressed in the short term due to the upcoming refinery turnaround season in Asia, diminishing floating storage inventories that will free up more tonnage as well as OPEC production cuts,” OFE said.
Asian refinery maintenance over the next two months is expected to lower March cargo flows out of the AG, weighing on VLCC rates. At least 2 mmb/d of refining capacity in the East of Suez is expected to be offline in March, more than double that of last year.
China's state-owned refiners account for around 50% of overall shut capacity in Asia in March, which will reduce AG-loading cargo volumes.
Additionally, the overall impact of OPEC's production cuts "is evident from the fall in VLCC fixtures from the AG."
The number of fixtures is estimated to have dropped by 9% m-o-m to 145 in February.
According to OPEC, compliance reached over 90% in January with Saudi Arabia shouldering the bulk of agreed cuts.