Flexible Help:
Boxship contracting in recent years has been dominated by very large ships. 73% of capacity contracted since start 2009 has been for units 8,000 TEU or larger. As these have been delivered, the flexibility of other ships in the fleet has enabled capacity growth to reach the areas where it has been needed most. Typically, new very large ships have replaced older (generally slightly smaller) ships on the mainlanes (Far East-Europe, Transpacific) which have been redeployed to the expanding north-south trades (or in some cases laid up). In turn medium sized units re-placed by newly redeployed, larger units have been moved to the fast growing intra-regional trades (or laid up).
Flexible and Friendly?
At times, this has protected main-lane freight rates from the full impact of the surplus. But it hasn`t been a flexible friend for everyone. Owners of small and medium sized tonnage (typically charter owners who account for 58% of capacity below 5,000 TEU), hoping they would be protected from the influx of new megaships, have still felt the sharp end of the surplus as capacity has cascaded down onto their patch.
The graph shows this process since the start of 2007. Cascade A shows the number of 3-8,000 TEU ships redeployed (or laid up) from the mainlane trades and Cascade B shows the number of 1-3,000 TEU ships moved off of the north-south trades. This doesn`t perfectly capture everything (e.g. deployment of newbuilds) but it shows the cascading pattern well.
In an immediate response to the economic downturn, 2H 08 to 2H 09 saw 280 ships cascaded and 2011 saw a total of 176. Mainlane freight rates (thick line) benefited from this but when cascading has slowed or turned negative (including reactivation of idle ships), such as in 2010, rates have eventually declined. In 2012 the rate of cascade slowed again with a net 84 units redeployed, and this led freight rates to decline significantly, and surplus has built up on the mainlanes. For operators it looks like time for another bout of serious cascading.
Watch That Limit!
But spare a thought for charter owners. After the first acceleration, cascading slowed and their earnings saw some upside but second time around, still shackled by 5% of capacity idle, charter rates (dot-ted line) remain in the doldrums, and it looks like another round of cascading may well come.
However, charter owners need not despair at the prospect of endless rounds of cascading. The amount of redeployable capacity isn`t infinite, and at some point the small and medium size ranges, where growth is limited, will probably feel some benefit. As credit card users know, even your flexible friend has a limit!