Growth in global container demand dries up as trade war heats up
Global container demand growth slowed to just 1% over the first nine months of the ...
Container line operators face an invidious choice as the fourth quarter looms.
Those that have not installed sulphur scrubbers must pass on the higher cost of fuel compliant with the low-sulphur requirement of IMO 2020, or consider incremental slow steaming to reduce bunker bills.
The results of research MSI suggests slowing the fleet by as little as one knot would, in theory, have a large impact on effective supply, producing a reduction of 3% and 6.6%, a spread which reflects the particular constraints imposed by the liner shipping business model.
But the potential consequences of such a slowing are probably more complex than the industry has yet considered.
They include: the trade-off between minimising fuel bills and offering a full network of port pairs; whether shippers are prepared to pay more for convenience; how far carriers are prepared to undercut their competitors; and the extent to which scrubber-heavy fleets will capitalise on lower slot costs.
To illustrate the critical importance of vessel deployment patterns to effective supply, MSI conducted an exercise that quantified the impact on effective vessel supply of a one-knot reduction in sailing speeds across the fleet.
To generate the required data, we used, and then manipulated, the characteristics of actual containership services, using a service characteristics database provided by eeSea. For each service in the database (totalling just under 1,300) we took data on the round-voyage distance (in nautical miles), the round-voyage time (in days) and the proportion of time spent in port. From this it was possible to calculate a required average sailing speed (in knots) for the ‘at sea’ proportion of each service.
To perform the slow-steaming scenario, we reduced this average sailing speed by one knot, and then re-calculated the sailing time with the formula sailing time = round-voyage distance/(new sailing speed *24). We also assumed no changes to port rotations or time spent in port. When the port time and recalculated sailing time are combined, this generates a new round-voyage loop time, measured in days.”
Since the number of round-voyage loops a vessel can make in a year, multiplied by the vessel’s carrying capacity, is what determines its contribution to annual supply, by changing the number of possible loops (through changes in service durations) the analysis allows comparison against the status quo. Under this assumption, the reduction in annual effective supply is -6.6%.
There is an issue with this approach, however, since the recalculated round-voyage service durations violate a key commandment of liner shipping: Thou Shalt Divide by Seven.
In order to arrive at weekly services, we rounded the recalculated voyage times to the nearest multiple of seven, so some services see unchanged durations (representing situations where slower sailing speeds are accommodated by cutting port calls), while others are extended by a whole week (representing situations where liners slow sailing speeds but maintain existing port calls, often in order to provide greater ‘buffer time’). Under these assumptions, the reduction in annual effective supply is closer to 3%.
What are the conclusions? The first is that incremental slow-steaming does in theory still exert a large impact on supply (in contrast to ideas that there is little scope for further slowing).
The second is that – based on the characteristics of existing liner services – slowing the fleet has a slightly larger impact on supply than speeding it up. Third, the theoretical impact on supply is far from the whole story, and in reality liner companies will face a trade-off between minimising fuel bills and offering a full network of port pairs.
Put another way, a liner company could reduce its fuel bill only to find its market share eroded by a different carrier offering more varied and faster connections. This will potentially sharpen the debate around some of the knottiest questions in liner shipping: will shippers be willing to pay more for more convenient services; whether subsidised carriers will still challenge industry profitability by undercutting competitors; and how scrubber-heavy fleets choose to capitalise on expected lower slot costs. For smaller vessels a reduction in port pairs offers the potential for greater transhipment activity.
A final consideration concerns a basic problem: if you want to extend a service by one week, you need an additional vessel to do so. However, the containership fleet above 5,000 teu is fully employed (even if actual load factors vary), and the only real pockets of idle capacity are among the smaller feeder fleet. New deliveries will to some degree offset this, but overall there are simply not enough vessels available to just extend a large number of services by one week.
What this implies in practice is that, if liners do choose to slow sailing speeds on a widespread basis, and if extending loop length is not always feasible given a lack of vessels, then port calls and connectivity will have to suffer.
Finally, in the timecharter market the potential for further artificial boosts to liner demand for tonnage – akin to the scrubber retrofit driver of earnings in recent quarters – could emerge if liner companies move into illiquid markets to secure like-for-like vessels as they extend service lengths.
This is guest post by Dan Richards, senior analyst at Maritime Strategies International