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According to the latest shipping market review from Danish Ship Finance, “massive oversupply” in the container sector will plague the industry for another two years.

After that, things “might improve” – subject to a return of a supply-demand equilibrium – but the road to higher rates is expected to be “long and bumpy”.

The report is critical of an industry that “continues to plan for the future as if past patterns still apply”, and argues that the global shift in manufacturing to lower-cost countries that was responsible for past trade expansions – and due to a sequence of events including China’s membership of the WTO in 2001 – is unlikely to be repeated.

The manufacturing shift away from advanced economies is “now losing steam” say the authors, noting that the level of global containerisation “seems to have plateaued” and that view significant additional jumps are “unlikely”.

Indeed, a perfect storm is brewing from a bulging cellular orderbook that has 1.9m teu scheduled for delivery this year – which, after scrapping adjustments, is calculated to increase global container fleet capacity by around 10%.

At the same time, market growth predictions have been downgraded. Maersk admitted in its first-quarter results last week that it expected growth to be “at the low end of the 3-5% range”.

However, Danish Ship Finance says the supply-demand gap could narrow by around 3% if carriers and tonnage operators are able to defer some scheduled deliveries a year, a tactic they have used in the past.

Half of the tonnage orderbook is for ultra-large container vessels of 14,000 teu and above, as ocean carriers continue their policy of reducing unit costs by upscaling ships to compensate for stubbornly low freight rates.

But these bigger ships need to be sufficiently utilised for the economics to work, and the flaw in the carrier strategy comes when the container alliances are unable to fill their ULCVs.

Thus, other than blank a voyage, carriers are forced to buy cargo on spot markets to improve their allocation levels, often at the expense of fellow members of their alliance, thereby perpetuating the vicious cycle of rate erosion.

Moreover, the spot market is gaining in influence, with anecdotal reports from China suggesting that shippers are walking away from annual contracts in favour of cheaper deals on offer that have been marked down in line with the substantial spot market falls since the beginning of the year.

Danish Ship Finance expects fleet utilisation levels to fall to around 79% in 2015 and 2016, which does not bode well for the voyage calculation aspiration of carriers, but is perhaps a reality that they must start getting used to.

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