News / Chinese manufacturers cut container production to hold prices as demand falls

For the first time in a decade, the world container fleet is likely to be getting smaller, in the fallout from the coronavirus pandemic.

New research from Drewry Maritime Advisors suggests that, despite warnings from freight service providers that global maritime supply chains are likely to come under increasing pressure due to a shortage of equipment, it appears Chinese box manufacturers have substantially cut production to maintain prices.

According to Drewry, global container manufacturing – both dry boxes and reefer units – in the first quarter of this year was among the lowest three-month periods ever, and represented a quarter-on-quarter decline of 33% and down 35% year on year.

Dry box production was 40% down year on year, while reefer production grew 4%, “as the shift of cargo from specialised reefer and air freight services to liner services and containers continued”, said Drewry. At the same time, new box prices and lease rates both grew as supply remained constrained.

“These increases mask intense volatility in the market during the period,” it said.

“At the start of the year, the price of a 20ft standard container stood at about $1,750. By the end of February, it had increased to as much as $2,150, before a sharp decline to approximately $1,900 in late March.

“The severity of Covid-19 and the lockdown in China and, subsequently, in large parts of the rest of the world was the cause of the slump,” it continued.

The bulk of orders this year are expected to come from shipping lines and container lessors that need to replace units that have come to the end of their life; the continued demand slump would discourage any operator from expanding its fleet.

“Drewry expects the ocean-borne fleet of containers to decline marginally, but it could be worse depending on the recovery in trade volumes.”

And it expected manufacturers to focus on preserving prices rather than hunt for greater market share.

“When it comes to prices, Drewry expects dry freight newbuilds to sustain their quarter-end value through the remainder of the year. Based on the poor financial position of most Chinese manufacturers, they will rather mothball some capacity rather than lower prices,” it added.

This analysis was largely supported by Brain Sondey, chief executive of container leasing company Triton International, who told investors during a first-quarter earnings call on Friday: “New container prices increased rapidly in the first part of the year due to early expectations for increased trade growth and actions by container manufacturers to rationalise shift capacity.

“While container prices have moderated recently, price indications remain over $2,000 for a 20ft dry container’, he added.

As of last week, Triton had placed $192.8m in orders for new boxes to be delivered this year, which Mr Sondey said was below the firm’s target level.

“We expect demand for leased containers to be negatively impacted for as long as global economic activity and trade volumes are weak. A prolonged slowdown in trade volumes due to the pandemic could significantly increase the financial challenges facing our customers.

“We are closely monitoring our customers’ payment performance and expect our customer credit risk will remain elevated as long as economic and trade disruptions persist,” he added.