Container shortage and rising demand could affect container pricing.
May 11, 2006 by SwizStick
Filed under 3PL, QuickNews, Seafreight, Supply Chain Management
The big news regarding ocean freight coming into 2006 was the imminent delivery of a number of large volume “super-post-Panamax” 8000+ TEU container vessels that would increase capacity faster than demand, leading to a drop in container freight pricing. I have expressed some skepticism in the past, noting infrastructure deficiencies, congestion, etc as possible obstacles that could prevent overall price reductions.
Recently I read 2 articles adding some new perspective to the argument. The first, from Supply & Demand Chain Executive, points to a shortage in steel supply, predicting a future container shortage:
IAS, which provides asset management applications and Web-based services to the global container shipping industry, said that its customers and the shipper community at large are gearing up for a squeeze on the existing world fleet. One shipper told IAS that container supply in Asia is already tight. “Shipping lines are having trouble getting equipment to support a 200 [20-foot equivalent unit (TEU)] per month glass shipment from Shanghai,” said Adam Firestone, president of California-based Firestone Vineyards.
The leasing sector, typically a steady supplier of equipment to the industry, may not be able to meet equipment demand. James Sherwood, president of Sea Containers Ltd., told IAS that he had never seen such a shortage of steel in the container industry. “At a price, steel will be available to manufacture containers, but will the lessors and shipping lines be prepared to pay the resultant container prices?” he asked.
One of the first indications that the market is tightening, according to IAS, is that depot inventories are down. “Analyzing activity at over 600 depots over the last three months, outbound activity has significantly exceeded inbound (indicating a draw-down of container stocks) by 41 percent,” said Heidi Regier, IAS senior market analyst.
As world trade continues to grow, especially Asian exports to the United States and Europe, demand for containers is at an all-time high, compounded by the steel shortage, which makes supply more difficult than ever.
Emphasis ours. And just this week the Journal of Commerce has a story by Peter Leach about ships running full for the first quarter of 2006, contrary to widespread prediction that capacity would begin to outstrip demand. The article is subscriber only, but here is an excerpt:
A funny thing happened on the way to the widely forecast vessel overcapacity in the first quarter. Ships on the main east-west trade lanes stayed fairly full. Despite widespread predictions that a glut of new container ships would swamp demand for space, growth in cargo volume matched growth in demand.
“Every Tom, Dick, and Harry came out with their forecast, and they got it wrong, and it damages us,” said Chris Bourne, executive director of the European Liners Affairs Assocation, which represents 24 carriers. “On Asia-Europe, we predicted full ships, and they said no, supply will exceed demand. There has been a significant drop in rates as a result, and it’s been very costly.”
The forecasters are still predicting the balance is likely to tilt in the direction of excess capacity as the year progresses and more big ships hit the market. Carriers know this and have cut back on contracting for new Panamax and larger ships in the last nine months, but “the threat of overcapacity is still there,” said Paul Dowell, director of research at London-based ship broker Howe Robinson. “The industry needs worldwide demand to run at 15 percent a year for the next two years to absorb capacity,”………….
But carriers are still reporting full ships. Adolf Adrion, managing director at Hapag Lloyd, said demand for cargo space on the trans-Pacific and Asia-Europe routes grew 13 percent in the first quarter, enough to absorb additions to capacity, which also totaled 13 percent.
Again, emphasis ours.
The article goes on to explain that the 16.5 percent increase in container capacity that is scheduled for 2006 has not yet gotten into the system and that some experts predict rates will drop approximately 15 percent on the trans-Pacific and Asia-Europe lanes. However, they also predict that if new ship contracts remain low and global demand exceeds 9 percent that any oversupply will quickly evaporate by 2009.
Freight rates have already come down and will most likely come down some more once the excess capacity starts showing up in the system. But if demand continues to exceed expectations while container supplies continue to be tight, the window will be shortened considerably. There is also the rising cost of fuel to consider as well as crude oil prices continue to remain high.
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