SeaIntelligence’s Jensen: container market recovery looks likelier in 2021… maybe

“There are few signs of a possible recovery until the Covid-19 crisis is well behind us and the earliest that I see this is in early 2021,” says Lars Jensen, CEO, Copenhagen-based SeaIntelligence Consulting. “Even so, we are already seeing a second wave of Covid cases in Asia … and so that date could go out much further. This means that carriers will continue to reduce the number of sailings and the longer this lasts the more this will become problematic for the Ports,” Jensen added.

Jensen told AJOT that there are three projections for recovery:

• The V Shape: “This assumes that the pandemic concerns have disappeared by July and that shippers are confident enough to order their Christmas supplies with big volumes starting to show up in August, September, etc. This appears to be very optimistic because we are already seeing a second wave of Covid cases in Asia. “
  
• The U Shape: “This assumes a recovery in early 2021 in which accelerated orders occur before Chinese New Year and there is a ramp up in container volumes. “
  
• The Third Option: “The third option is that we don’t see a recovery in either period and we are in uncharted waters.”
  

Ports paying a price for accommodating mega-container ships

Jensen, who has been critical of the decision by ocean carriers to heavily invest in 18,000 TEU ships and larger says ports and terminals who upgraded to accommodate the mega-container ships are now paying the price with higher debt at a time of economic recession. There are currently between 150-200 of these vessels either sailing or soon to be delivered to their owners:

“The terminals have been forced for the last 4-5 years to buy cranes and other upgrades in order to handle larger container vessels. This was done in the anticipation of 18,000 TEU vessels arriving at their ports. In some cases, they have arrived once in a blue moon, but the price the carriers demand for admission to their services is this investment. The result is higher debt and now a global uncertainty due to the Covid-virus and the resulting recession. On top of this there are 150-200 very large container vessels that are sailing or soon to be delivered. Those ships have to go somewhere. The decision to build 18,000 TEU and bigger ships is to reduce the per container rate of transport. For this, the bigger ships do very well.”

Higher Transshipment Costs

However, bigger ships are limited to a smaller number of ports, built to accommodate them. So, shippers are forced to pay more money for trucking and feeder shipping to get containers to their final destination:

“The problem is that you now require more transshipment costs such as, additional feederships and more trucking. For example, if I had two sailings per week of a 10,000 TEU ship and I now replace that with one sailing of a 20,000 TEU ship you have doubled the need for trucking on one day but eliminated it for the second sailing. So now you have to maintain a supply of trucking that has less days to work. At the same time your warehouses get more containers in a shorter space of time …In Europe and Asia, you increase the need for feederships to deliver containers to smaller ports that cannot handle the bigger ships. So, the carriers’ unit costs go down but the costs to the ports, truckers, warehouses and ultimately to the shippers go up.”

Is 14,000 TEU Optimum Size?

Jensen has argued for years that the optimum size vessel for most ports is around 14,000 TEUS:

“A smaller 14,000 TEU ship gives you more flexibility to serve more ports at a lower cost to the supply chain, shippers and the ports. The shipper is going to be less likely to pay the ocean freight rate when using the bigger ship results in higher transshipment and supply chain costs.”

Carriers, more invested in 14,000 TEU vessels, will have an advantage in being able to serve more markets:

“.. if I have a service between Shanghai and Los Angeles/Long Beach I can use a 20,000 TEU ship because all three ports have the capability of handling those vessels. The problem is that I might eliminate stopping in Xiamen (located along the Southern Chinese coast) and my competitor might offer that stop…We also see that the actual number of sailings provides more flexibility with the smaller vessels.”

Avoiding the Suez Canal

As a result of lower fuel costs, some carriers sailing between Asia and Northern Europe are sailing around the Southern coast of Africa to avoid paying $500,000 to $750,000 in fees to transit the Suez Canal:

“In an echo of 2016, we are seeing the impact of lower oil prices and one of the impacts had been on some carriers going between Asia and Northern Europe bypassing the Suez Canal. The Suez Canal charges $500-$700,000 per passage. The passage around Africa is cheaper with the lower fuel costs to sail to Northern Europe from Asia even though the distance is greater and the fuel consumption is higher. The lower oil prices now make this voyage more economical. In addition, as a result of the recession, importers can afford an additional week in sailing time because the demand is not high enough to pay for faster deliveries.”

The Suez Canal authority has offered a 5% discount on ships transiting between Asia and northern Europe, he says but that may not be enough: “as we see more carriers are opting to take the African route.”

According to Jensen, "The Suez Canal Authorities now trying to “strike back” against the competition from low oil prices.

In circular issued earlier today they are increasing their discount scheme clearly aimed at trying to prevent more container vessels from taking the long route around Africa.
For North Europe to Asia they now offer a rebate of 17% compared to the normal tolls, though not for certain surcharges. This is an increase from the previously offered discount of 6% instituted from 1st of April which did not prevent some vessels from going the long route.
For East Coast North America to Asia, the rebates have been increased to the range of 60-75% depending on the specific origin and destination. This is an increase from the rebate already in place which was in the range of 45-65%.
The new discounts are in effect from 1st of May to 30th of June.
Presently at least 8 vessels operated by the Ocean Alliance and the 2M Alliance either have, or are scheduled to, bypass the Suez Canal and take advantage of the low oil prices versus the canal tolls.
Whether this new discount will be sufficient to prevent the bypass will be revealed when we see the actual routing of the large vessels over the coming weeks."