A positive market on average but mixed developments throughout the various sizes

Container Market

The major topic for the global container charter market during the last couple of months has been the upcoming IMO 2020 fuel oil sulfur limit, which already showed its first real effects. The installation of exhaust gas scrubbers, which for most vessels takes at least 40 days, caused large tonnage to become in short supply, especially in the Asian trading area.

By early September all ships above 2,000 TEU had found employment as the liner operators had increasingly been forced to charter in smaller and smaller tonnage as dry-dock replacements. From the beginning of July to the beginning of September charter rates for 2,500 TEU geared, 2,700 TEU gearless, 3,500 TEU gearless and 4,250 TEU gearless ships increased by 7%, 13%, 23% and 53% respectively. In the Americas the scrubber effect has not been as significant yet but did help to balance other adverse developments to some degree as described in the comments below.

Contrary to the generally improving market, the 2,500 TEU segment did experience a small decline throughout the summer. As two major liner operators upsized from 2,500 TEU ships to 7,000 TEU and 4,500 TEU wide-beam tonnage respectively, more than ten-high reefer 2,500 TEU vessels became surplus or had to shift to other services where capacity is not fully utilized. Despite those service restructurings barely any ships remained idle in the Caribbean during the last months, but the surplus tonnage availability in Europe put pressure on the rates which declined to about USD 10,000 levels. In addition to the overall pressure on earnings the premium for high reefer ships all but disappeared.

The oftentimes stable balance of supply and demand in the Americas can be illustrated by one ship sitting idle for almost 4 months as no suitable extra requirement materialized during that time.

One factor preventing the market from falling even further was that several 2,500 TEU ships sailed to the Mediterranean in order to have scrubbers installed.

The modern, more fuel economic managed to keep rates stable in the mid USD 13,000 range.

The 1,700 TEU category faired relatively well on the back of tight supply and charter rates increased by about 20% during the last four months to mid/high USD 9,000 levels. Ships in this size rarely fell into spot positions during the summer and there was even a small net inflow of 1,700 TEU when adding up all the ships coming/leaving from/to Asia and Europe. In addition to better rates many ships were able to fix periods lasting for more than 12 months. Two ships will also have scrubbers fitted; one coming from Asia and one left the Caribbean for a European shipyard to return after the retrofitting works have been completed.

The high reefer 1,300 TEU segment proved once again to be fairly stable. In sync with the adjacent size categories of 1,100 and 1,700 TEU charter rates also improved during the end of the summer from mid USD 8,000 to very high USD 8,000 or low USD 9,000 levels. Compared to the relatively weak Mediterranean market the rate difference for those ships had increased to USD 1,500/2,000 by early September.

After an unspectacular spring the 1,100 TEU segment faced a rollercoaster ride during the summer. In the middle of May five ships of around 1,100 TEU, representing over 10% of total capacity in this segment and area, where unemployed in the Americas. By July/August however two operators opened new services which they had planned to fill with 1,100 TEU tonnage. As the new services required five ships and some of the previously unemployed ones had left the area or had found new employment by then, not all positions could be filled with the planned capacity. As a consequence, one operator was forced to charter in a 1,300 TEU ship and another had to take a 1,100 TEU ship from the Mediterranean. The scarcity of tonnage also lifted the market from high USD 6,000 to low USD 7,000 levels.

Geared eco-ships continue to earn a significantly higher rate than the standard tonnage. Since rates and employment prospects in other areas of the world and especially in Asia are relatively poor for those kinds of ships, owners continued to show interest in positioning their ships to the Americas using project cargo from Asia or containerized aid cargo from the Mediterranean.

Very small container ships of under 800 TEU have shrunk to a marginal role in the Americas. As only about 15 charter ships and the same number of shipping line-owned ships remain, the charter market has become relatively illiquid. Consequentially, ships on the one hand have to regularly bear idle times between employments but on the other hand are able to command good rates once a requirement turns up as the competition is limited. On a small scale though, fresh projects are still being realized as a new operator chartered a gearless 500 TEU ship coming from Europe for a service catering to Venezuela.

Although the very large majority of ships trading in intra-Americas services are still geared, the interest in gearless vessels is steadily increasing as port infrastructure developments are progressing. One gearless 1,300 TEU ship positioned from the Mediterranean to the Caribbean during the summer and charterers are also looking at 1,200 TEU gearless ships currently operated in European waters.

A whole new port and container terminal opened for business in August in Posorja, Ecuador. A little south of Guayaquil, the new deepwater port imposes no vessel size limitations and is already served by container ships up to 11,000 TEU. Although Guayaquil is also able to accommodate ships this size, the new terminal might pose new options to rationalize or upgrade some of the nine WCSA feeder services currently run with 19 ships between 950 TEU and 2,500 TEU.

The new container terminal in Puerto Moín now, after a slow and problem-laden start at the beginning of the year, had a major impact on the 2,500 TEU category. As mentioned above, the employment of larger gearless vessels has significantly reduced the demand for the traditional 2,500 TEU geared ship. Since the beginning of September, three transatlantic services, utilizing gearless ships of 3,500 TEU to 7,000 TEU have now been established.

Macroeconomics

The US-China trade war, Brexit-related uncertainty and volatile energy prices due to geopolitical tensions still provide several risks to global economic expansion. Against these odds, the global economy still nevertheless forecasted to yield 3.2% growth in 2019 with 3.5% in 2020; however, with less global trade activity than previously anticipated. Expected trade volume growth declined to around 2.5% for 2019, dropping by 1.2% compared to 2018. About 70% of the increase in the global growth forecast for 2020 relative to 2019 is accounted for by projected stabilization or recovery in stressed economies.

The emerging market and developing economy group is expected to grow at 2.9% in 2019, rising to 4.8% in 2020. The economic growth forecasts for the Latin America and the Caribbean region for 2019 and 2020 have been downgraded since the beginning of the year to just 0.6% and 2.3% respectively.

On average the Caribbean is faring better than South America as for example the Eastern Caribbean Central Bank is forecasting 4% growth for the region in 2019. On an individual country level though the outlook remains mixed as the Dominican Republic, Antigua & Barbuda, Dominica and Grenada are all expected to expand by over 4% whereas Jamaica, Barbados and Trinidad & Tobago are predicted to grow very little, if at all, this year.

The political and economic turmoil in Venezuela still remains unsolved. After a relatively stable situation in terms of container shipping in 2018 and 2019 the situation did deteriorate during the summer. The number ships trading in regular liner services to Venezuela has further been reduced to just seven ships. Ad hoc calls are instead becoming more and more the normality. The cost of transport has also drastically increased as some ship owners are now reluctant to call Venezuelan ports at all and most of the liner operators have levied war risk surcharges of over USD 1,000 per container.

The dire situation in Venezuela is also having knock on effects on Cuba where fuel shortages are arising and the government is forced to favor upholding basic services to the people over long-term investments. Additionally, the tightening of US sanctions is expected to have negative implications for economic growth.

Besides the financial and political issues several countries in the region have to deal with natural disasters and these exacerbate the region's macroeconomic challenges. The estimated cost of the impact of hurricanes and floods in the region is approximately 2% GDP per year.

Sale & Purchase of Container Tonnage in the Caribbean

Direct Caribbean sale and purchase activity was very limited and is not expected to rise much as only about a handful of ships in various sizes, currently sailing in the area, are for sale. The last geared 500 TEU charter ship has been sold to South East Asian end users leaving only some geared 700 TEU ships charter ships and a few small ships employed in liners' own trades in the region. In an unusual move, a US niche carrier has bought a 700 TEU ship in Asia which is to be equipped with scrubber and cranes before joining the US Gulf service. Furthermore, a gearless 700 TEU ship changed from Dutch to German hands and remains in the Caribbean as a charter ship.

Despite the increase in charter rates since August, especially in Asia, ship prices have not risen yet as uncertainty remains and the banks are currently pushing large amounts of tonnage into the market.

None of the newbuilding projects in the sub 2,000 TEU segment for Caribbean trading accounts has materialized as of yet.

Scrap prices for container ships on the Indian Subcontinent have fallen by about 75$ to 100$ per ton during the last four months. In combination with rising charter rates, this development has caused scrapping activity to fall close to zero during the summer. A number of ships were actually sold on by cash buyers for further trading after they had originally been sold for recycling.