More capacity threatens rates

Massive increases in capacity are threatening the fragile balance of supply and demand in global container shipping.

CMA CGM is expected to sign an order within weeks for nine giant 22k teu vessels; each of which will be larger than the current largest boxship afloat, the OOCL Hong Kong.

Following a 2016 with the lowest capacity growth ever recorded and the first year that more vessels left service than entered it, experts believe that the CMA CGM orders threaten the industry’s fragile return to profitability.Arrivee du a Marseille du CMA-CGM Jules Verne, plus grand porte-conteneurs du monde.

While the orders would be the first for vessels between 10-25k TEU in 2017, such ships are entering the Asia-Europe trade at a pace of once per week.

There are currently 58 ships in the 10-25k TEU range under construction and that number will jump to 73 in 2018.

Even if demand continues to grow on the key east-west trades, experts agree that it is extremely unlikely it will equal the capacity injection by Ocean Alliance, especially if the new CMA CGM order is confirmed.

Despite a long period of capacity control through blanked sailings, laid-up tonnage and lower new ship orders, it appears that the attractive economies of big ships is still so powerful that it has tempted CMA CGM to risk undermining the industry’s recovery.

The CMA CGM decision is indicative of the major problem that the global shipping industry faces.

From an industry perspective there is simply no good reason to add this volume, but the carriers understandably make decisions and investments in their own interest with the potential impact on the wider industry a peripheral consideration.

Adding the nine 22k TEU ships will almost double CMA CGM’s current order book to around 423k TEU and close the gap with its nearest competitors, but would not reclaim its ranking as the world’s third-largest ocean carrier.

While CMA CGM’s order will not significantly alter the supply-demand dynamics, it will become more of a problem if other carriers play catch-up and place orders for ‘giant’ ships.

The industry’s current order book is already close to 3 million TEU due by the end of 2020 to add to the current fleet that recently topped 20 million TEU.

The bulk of deliveries are due before 2019 and are “heavily skewed” at the top end of the range with 18k plus-TEU ships that have very limited deployment options, accounting for around 40%.

While the CMA CGM decision suggests the French line is eager to grow market share, other lines reliance on charter fleets mean they are not so well positioned.

The fear is that if demand falters carriers cannot match their supply and demand through the absorption of new tonnage on the order book by returning tonnage on charter to ship owners, which would create a commercial imperative for the carriers to chase cargo at any price in order to keep their vessels filled.

Sounds a bit like going full circle.