Freight Rates Drop as Overcapacity Continues to Rise
The container overcapacity that has caused international shipping rates to plummet is forecast to continue through the fourth quarter and into next year. A slump in demand combined with abundant fleets and plenty of available capacity has already driven massive consolidation. Find out what to expect from growth rates in the years ahead.
Causes of Overcapacity
With a booming U.S. economy and consumers who continually seek out attractively priced merchandise, many wonder why big container ships are facing such a crisis. The biggest reason is the sudden surge in megaships. New ocean carriers are often 40 percent larger than the vessels designed just 10 years ago.
Capacity is the greatest load ships can contain. To be efficient, suppliers want ships to carry maximum loads with each voyage. If there are not enough ships to accommodate freight, it is viewed as under capacity. Overcapacity is the opposite, with more available ships than freight.
Global economic growth slowdown has created overcapacity across the globe. Industries are expected to grow only 2.2 percent this year, while shipping fleets predict 7.7 percent growth. The standard container cargo measure is in 20-foot equivalent units (TEUs). Capacity is predicted to increase by 1.6 million TEUs.
As manufacturers build new ships, the old ones are still around. Most of them are relatively new, so they’re still in service on major routes. Slow steaming and idling reduce costs for some organizations, and owners are keeping older vessels on hand in hopes demand will increase.
As overcapacity threatens shareholder returns, a slump in container shipping demand and vessel capacity surplus has caused the industry to rush toward massive consolidation. China’s container carriers COSCO and CSCL merged in 2016, but continued to honor contracts into this year. COSCO profits were down 22 percent the year before the merger and CSCL faced a $456 million loss after China’s economic slowdown and global overcapacity.
In France, CMA CGM bought APL’s parent company Neptune Orient Lines. Japan’s three major lines have also agreed to merge starting early next year. Kawasaki Kisen Kaisha (K Line), Mitsui O.S.K. (MOL), and Nippon Yusen Kabushiki Kaisha (NYK) will create the sixth largest carrier in the world with a capacity of around 1.4 million TEU.
Loads always cost more in the fourth quarter because of the increased holiday demand, but 2017 will not be as profitable as previous years. Container shipping will struggle with rampant overcapacity through the end of this year and into next.
Industries continue to invest in new models because larger, newer vessels provide higher efficiency and a competitive advantage. The Boston Consulting Group points to increasing container capacity and projects the gap between the demand for goods and the oversupply in vessels will be 2 million to 3.3 million TEUs by 2020.
Some analysts, however, feel the industry is moving toward stability. Intermodal Europe takes place at the end of November and unites experts from the container shipping and intermodal industry to share insights and streamline operations. This year’s conference leaders are optimistic after new alliances have created signs of industry revival.