Global overcapacity weighs on Caribbean charter market

Container market

The global – and the Caribbean – container charter market did not recover during the fall this year. Instead, earnings declined throughout all size segments, but to a lesser degree than in Europe or Asia.

Ships of 2,500 teu were in relatively short supply throughout the last couple of months. Despite the balanced Caribbean market, charter rates trended downwards about US$ 1,000 for standard ships as cheaper candidates were available in the Mediterranean or from Asia. An exception to the overall negative development provided modern economic vessels and high reefer ships with 600 or more reefer plugs. Eco vessels could achieve high US$ 14,000s levels on the back of continuously high bunker prices. Strong demand for high reefer ships, both from specialized fruit traders and from the main liners, kept charter rates for such ships between US$ 12,000 and US$ 13,000. One traditional reefer operator recently decided to change to containerships again after a transatlantic service run with 1,300 teu ships had been switched over to reefer ships at the beginning of the year. This time, the new service will be run with 2,500 teu ships and in cooperation with a main line operator.

Ships of 1,700 teu experienced a similar fate as the standard 2,500 teu ships with slowly declining rates during the fall. Again, supply in the Caribbean was limited, but at times up to 10 ships were looking for employment in the Mediterranean. Although the oversupply situation has improved on the European side of the Atlantic, charter rates are expected to further correct downwards as the current rate difference of US$ 1,500 to US$ 2,000 is rather large. Low rates in Asia also induced one 1,700 teu ship to ballast across the Pacific for a WCSA employment.

High reefer ships of 1,300 teu were once again fixing higher rates than 1,700 teu ships by the end of the year. The general pressure on earnings was, however, also felt by those specialist ships as rates declined from US$ 10,000 to US$ 9,000 towards the end of the year. The very large rate difference of sometimes over US$ 2,000 between the various trading areas even tempted one ship from Asia to position by taking new empty reefers without having a subsequent charter.

The 1,100 teu segment proved relatively stable. From mid US$ 7,000 levels, charter rates did only decrease to low US$ 7,000 levels by the end of the year. More than a year after the originally scheduled delivery date, the first of three 1,100 teu newbuildings contracted by a Caribbean specialist operator had been delivered and will arrive in the Caribbean in early January. As this operator has four 1,000/1,100 teu ships on charter, those newbuildings might release some extra charter ships in the near future.

The pool of very small containerships below 800 teu continues to shrink. At the end of 2018 only 14 timecharter ships of between 400 and 800 teu were left trading in the Americas. Charter rates are relatively high, with fixtures in the high US$ 6,000 to low US$ 7,000 range, but this tonnage has to be a bit lucky as waiting time between employments has become more common.

As always whenever rates are on a declining path, charterers can also secure more flexibility on the period. In the Americas this flexibility has, however, not extended to the same degree as in Europe, where in some cases ships had to fix periods of two to 12 months in order to secure employment.

In general it was relatively easy to find a positioning cargo to Asia or Europe for ships that needed to drydock, as plenty of empty containers also needed repositioning in both directions.

The global upsizing trend also materialized in the Caribbean, albeit at a slower pace. One operator replaced a 700 teu ship with a 1,100 teu vessel and the 700 teu ship in turn replaced a 500 teu vessel which was then redelivered. Another service was upsized from 1,300 to 1,700 teu. Overall, the upsizing trend has so far stopped at the 2,500 teu category. Over the last three years the number of ships trading in Latin America and Caribbean-related services has fallen by 20 per cent for ships up to 1,000 teu and by 14 per cent for 1,000 to 2,000 teu ships. In contrast, the number of 2,000 to 3,000 teu vessels remained constant. Despite offering very low slot costs, ships of 3,000 to 5,000 teu have so far not really found their way into the Caribbean. At the end of the year there were only 38 ships deployed on intra-Americas trades, whereof only about a quarter are deployed on feeder services. The rest plow longer routes such as USEC to WCSA or ECSA to WCSA.

In the 2,000 teu-plus sizes, operators will in the future have more options to deploy gearless ships as Puerto Moin in Costa Rica and Puerto Cortez in Honduras inaugurated the first stages of their port expansion programs. Both ports are now equipped with large ship-to-shore gantry cranes where previously only limited landside facilities were available.

Macroeconomics

The global economic outlook has darkened somewhat since the beginning of the year. The International Monetary Fund revised its forecast for 2019 down to 3.7 per cent in October. The global trade outlook is almost on a par with an expected growth of four per cent. The ongoing trade war between China and the United States, the still open outcome of the Brexit process and the local financial crisis in, for example, Argentina and Turkey all pose further downside risks to the global economic expansion.

The economic picture in the Americas is fairly diverse. The Caribbean countries are forecast to grow at a slower rate than 2018, the Central American region at a higher pace. Both areas, though, are with 3.7 per cent and 3.8 per cent at the higher end of the spectrum. Brazil (2.4 per cent), Colombia (3.6 per cent) and Mexico (2.5 per cent) are all expected to fare better in 2019 than in 2018.

Cuba, one of the largest Caribbean nations, continues to struggle economically. Hurricanes, new US sanctions and the collapse of its economic and ideological partner, Venezuela, have kept growth in 2018 at about one per cent. For 2019 a similar growth rate is to be expected. One of its largest ‘exports’ – doctors – is also on the decline. The revenue gained from sending medical doctors out in the world has decreased over the last four years from US$ 10.2 billion to US$ 7.7 billion. Recently, Cuba withdrew another 8,000 doctors from Brazil after the Brazilian government criticized the practice as ‘slave labor’.

In Venezuela the situation has not changed: a shrinking economy leading to an intensifying humanitarian crisis. After a projected 1.4 million per cent inflation rate for the past year, 2019 is expected to be even worse with 10 million per cent. As a consequence of the shrinking output and purchase power, the number of regular container liner services has further been reduced. As of December, only seven strings employing nine ships of between 700 and 2,500 teu are left serving the country.

Sale and purchase of container tonnage in Caribbean

With the decline in charter rates, ship values also softened and sale and purchase activity slowed during the fall as often sellers’ ideas exceeded buyers’ budgets. A considerable number of forced / bank-driven sales, however, still took place.

One 700 teu ship was sold and left the Caribbean area towards Europe. A sister is about to be sold to a yet unknown destination.

On the newbuilding front, no orders for Caribbean-suitable tonnage have been placed, but liners operating in the Caribbean are examining newbuilding options for 1,000 to 2,000 teu gearless ships.

Scrapping activity has sharply increased since July. A total of 27 containerships of between 1,000 and 2,000 teu (7 x 1,100; 7 x 1,300; 11 x 1,700; 2 x 2,000) and an average age of 23 years have been sold for scrap since. Only two of those ships had, however, been trading in the Americas.