Drewry Shipping Consultants, the world’s leading maritime consultants, in a new report ‘Capacity Management – surviving the container crisis,’ concludes that carriers need to act now and decisively.
While the past six months have seen a huge amount of capacity changes in the industry, freight rates continue to plummet while the industry shirks the painful decisions that are needed to ensure their collective survival, it said.
In the Capacity Management report, Drewry analyses how carriers have reacted to the global economic crisis and what steps will need to be taken if they are to survive.
So far they have been altering capacity via service suspensions, slow steaming, service deviations and lay-ups but no action on a collective front. Drewry also argues that the operators who move the fastest and are the most radical in their strategies will be best placed for recovery in the long term.
“Without a doubt, scrapping and wholesale cancellation of the container orderbook are the two most effective tools of capacity management. While scrapping has increased significantly since 4Q08, it will not alter the fleet enough to make a real difference and carriers will not start sending ships younger than 20 years to the scrap yards,” Drewry says.
“Unlike in the bulk sector, cancellations of container ships have been very scarce indeed and for the moment at least carriers seem reluctant to forfeit large initial downpayments on their orders made in 2007 and yards are definitely playing hardball.”
Over 50 main services have been suspended from the core east-west trades since October 2008, but while the end result has led to a net 20-25 per cent reduction in overall capacity on the Asia to Europe and Mediterranean routes, relatively few vessels have been laid up. Furthermore, this has not arrested the very sharp decline in freight rates.
Surprisingly low lay-up figures
Drewry’s analysis of the core east-west routes identified a total of 48 vessels (249,000 teu) or approximately 3.5 per cent total available capacity (2 per cent of global capacity) that has been laid up, mainly in Asian ports. Many vessels have simply been cascaded elsewhere and in a number of cases two services have been amalgamated into one with resultant tonnage.
This suggests that carriers are still reluctant to lay vessels up despite the desperate trading conditions and that other means of capacity management, though less radical, are more prevalent.
Adjusting to the new economics
Neil Dekker, editor of the Drewry report, says: “While slow steaming has become widely adopted on the Asia-N Europe/Mediterranean trades, several services have remained unchanged even as fuel prices rose to over $700/tonne and then came back down towards $200/tonne. Even at the current fuel price of around $270/tonne, it costs almost $350,000 more to make an Asia-North Europe round voyage on a 56-day rotation (ie an eight-ship cycle) than on a 70-day schedule (10 ships).
“That’s over $17 million a year. It is not at all clear that carriers ever fully priced their services to cover the costs of fast transits, but in the present market conditions it is certain that shippers and importers will not pay for speed. Carriers can hardly afford to allow this if they are to continue as viable companies in their present form.”
Similarly inconsistent strategy characterises the diversion of services to avoid the Suez or Panama Canals. This has been adopted by only a few carriers on only a small number of strings, and only on the backhaul leg, so that a single carrier or group can be operating both high- and low-cost services alongside each other.
