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Does the Depression in Container Ship Market Have Structural Factors?

The recent depression in container ship market is getting protracted, and we are going to take a look at it from a supply-demand perspective for shipping market and size up its prospects.

Low growth for shipping due to slowing exports from Asia

According to “The Causes and Implications of the Export Slow-down in Asia”, a report published in June by Korea Center for International Finance (KCIF), the slowing growth in Asia was found to have two major causes. One factor is economic cycle. Lagging demand and investment and slowing economy in advanced countries have lowered the demand for imports in those countries. The other structural factor is that manufacturing returning to advanced countries (increasing reshoring) and domestic demand-driven growth strategy for China have stoked up protectionist measures such as weakening global value chain and technical barriers to trade, which has led to lagging export sales.

Growth in the volume of merchandise trade, 2010-2013
Growth in the volume of merchandise trade, 2010-2013 (UNCTAD)

KCIF further forecast that exports from Asia wont’ show a recovery as quick as before the financial crisis, owing to the slow economic recovery in the US and Europe and weakening global value chain. This suggests that the slowing export from Asia, the largest shipping market in the world, is a long-term trend and that the cargo volume for the global shipping market will register a low growth rate for a long time.

Intensifying competition among shipping companies in ordering ships

Like this, while demand for shipping market is expected to register low growth for a long time, shipowners are into ordering ships to add to supply. As of last July, there were 29 ultra-large ships of 18,000 TEU and above, and with 68 ships already ordered, total 97 ultra-large ships will be delivered no later than 2019. And looking to 2018, 55 ultra-large ships of 13,000 to 17,999 TEU have been ordered.

The Emergence of the Mega Boxship orderbook
The Emergence of the Mega Boxship orderbook (Clarksons Research)

Then, why is it that ultra-large ships continue to be ordered in the face of such oversupply? Since it is extremely difficult to achieve differentiation of services in current shipping market, the only feasible competitive strategy has to ensure continuous cost advantage. For this reason, shipowners cannot but keep ordering large ships that allow fuel cost and ship operating cost reduction.

Causes for the long-term depression in container ship market

Quite likely, shipping market, and particularly, container ship market is facing a long-term and structural depression, for following reasons.

First, while service differentiation is difficult, shipping companies cannot help choosing the option that would secure cost competitiveness. In other words, their practically only alternative has become to get ultra-large ships that have cost advantage at the risk of oversupply when demand is weak.

Second, endless cost competition has become inevitable, because a strategic alliance aims to maximize cost reduction effect by reorganizing sea routes and services through making ships ultra large.

Third, support for shipping and shipbuilding industry from countries of the world is aggravating oversupply. While performing an important role in creating the basis for the growth of shipping and shipbuilding industry, it has made shipowners and shipyards forfeit the ability to autonomously adjust demand and supply according to the shipping business cycle.

Long-term depression is expected to continue

In the current container ship market, ultra-large ships and strategic alliances are not optional but required. But, the depression of the container ship market is likely to be long-term and structural, in that ultra-large ships and strategic alliances will cause another oversupply. Mindful that the current container ship market is increasingly likely to have a perpetuated oversupply, shipping companies must stop expecting to see oversupply corrected and should instead come up with a way to survive this market situation.

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 267