Summer Slowdown

Container market

From late spring to early summer the global container charter market continued on a positive trend. Since then, owners’ fortunes have stalled or reversed, the extent depending on the specific ship size and type. The Caribbean followed this general trend, although the downward correction in July and August has not been as significant as in European or the Asian markets.

In sync with the slightly declining rates, the number of vessels employed in Latin America trades under 3,000 teu has shrunk by 16 ships over the last five months. The supply-demand balance is still relatively intact, however, as only a handful of vessels were readily available at the end of August. Most of the surplus tonnage left for other trading areas, as many of them had to dock for class renewal anyway.

In May and June 2,500 teu ships enjoyed further rate increases up to almost US$ 13,000. With those improved earnings, the bonus for high reefer tonnage disappeared. Modern, more fuel-economic ships, however, were able to command rate premiums of around US$ 3,000. Despite the rate decrease of between 10 and 20 per cent for such tonnage in Asia during July and August, the earning levels in the Caribbean trading area remained stable on a more balanced Atlantic market. Compared with the smaller vessels in the area, the 2,500 teu ships also suffered the least rate decline. One charterer wanting to upsize his service even had to stick with a 1,700 teu as no larger tonnage was available without a ballast leg from the Mediterranean.

The 1,700 teu segment followed a similar path as the larger vessels, with rates going up to over US$ 11,000. By the end of August, though, earnings had fallen back to US$ 10,000 levels as more ships were readily available. This size category also experienced the largest reduction in numbers employed as service rationalizations in the Maersk/Hamburg Süd network set free some 1,800 teu ships. As earnings in other parts of the world had reached similar levels to the Caribbean market, most ships having to drydock quickly left the area for cheaper yard options in Asia or the Mediterranean.

Contrary to other categories, the 1,300 teu ships did not enjoy further rate increases. The main reason was probably because of the closure of one transatlantic high reefer service run with those ships. The redelivered vessels and the remaining ones available for relet kept charter rates in check. With rates at around US$ 10,000 those ships had nonetheless already reached decent levels earlier this year and a balanced supply and demand had been reached at the end of August as some vessels were also absorbed by a service upsizing from 1,100 to 1,300 teu.

The 1,100 teu segment reached its rate peak earlier than the larger ships and also registered, in percentage terms, the largest decline since May. The pressure on charter rates was caused not only by surplus tonnage in the Caribbean but also by high numbers of available ships in the Mediterranean. Since the earnings difference between the two areas stood at around US$ 1,000 at the end of August, ships with a Caribbean position could not demand more in order not to tempt ships from the Mediterranean to position.

The market for small ships below 900 teu continues to shrink as two more geared 650 teu ships are for sale with yet unknown destinations. In general, rates remain relatively strong as the competition is low, but the ships sometimes have to absorb considerable idle times before a new employment can be found.

Overall, the development of teu volumes and vessel calls in the Americas over the last five years has been very diverse. From 2013 to 2017 teu throughput volumes in Central America grew by about three per cent annually, whereas South American volumes increased by 1.5 per cent, North Coast South America by one per cent and Caribbean volumes even decreased by over one per cent per year. Out of the five highest Caribbean throughput countries – Dominican Republic, Jamaica, Puerto Rico, Bahamas and Trinidad & Tobago – only the Dominican Republic managed to increase volumes.

In Freeport, Bahamas, for example, the number of vessel calls by ships larger than 5,300 teu jumped 57 per cent between 2015 and 2017 because of the opening of the new Panama Canal locks. Over the same period, the amount of calls by ships smaller than 3,000 teu also increased by 35 per cent while the traditional panamax class lost about 14 per cent. Despite the higher number of vessel calls, though, the teu throughput fell by more than a third. This might be explained by the fact that, today, more containers from the Far East are being shipped directly to US ports without transshipment in the Caribbean as higher vessel capacities render longer voyages/services more economical.

Macroeconomics

The trade war between China and the US has now materialized, with several rounds of tariffs slapped on imports worth over US$ 50 billion on both sides. So far, though, the impact has been more pronounced on shipping than on the overall economy. Despite those barriers to trade, the US did post record high growth of 4.2 per cent (annualized) in the second quarter. The shipping world benefitted during the summer as many American importers were bringing orders forward in order to fill their warehouses before certain tariffs come into place. As a consequence, spot freight rates increased on the transatlantic route and several extra loader vessels had to be chartered in, albeit only vessels of 4,000 teu and more. This effect, however, will most likely be only temporary. In the mid to long term, the trade flows might shift slightly as many Chinese companies are relocating their last assembly step to another Asian country in order to circumvent the tariffs.

The overall GDP growth expectations for Latin America and the Caribbean have been revised downwards to 1.6 per cent since the beginning of the year. For next year, though, forecasts still stand at a positive 2.6 per cent. The global trade growth rate is predicted to decrease slightly in 2019 but should still be close to five per cent. In Latin America and the Caribbean, trade figures this year are in positive territory, but more of the positive development is contributed by higher commodity prices than by increased volumes.

On a global scale, rising interest rates in the US are hurting investment flows into developing countries as the spread between interest rates is generally decreasing. Additionally, certain currencies (the Russian ruble, Brazilian real, Turkish lira, Argentine peso) did come under pressure due to rate hikes, US tariffs or US sanctions. With investment rates in the Caribbean countries already historically low, these recent developments are not in favor of future growth.

Brazil and Mexico are both experiencing moderate growth at around 2.5 per cent this year as Brazil is being plagued by a weak currency and Mexico so far suffered under the uncertainty of the NAFTA renegotiations. With the new agreement having been struck in August, though, the situation, especially for investments, should improve.

Venezuela continues to be stuck in a downward spiral, with severe economic and social problems. Lack of food, hyperinflation, shrinking oil production and emigration are some of the issues that have led the economy to shrink harshly. As a consequence, teu volumes have almost halved in the course of the last five years.

Sale and purchase of container tonnage in Caribbean

The global sale and purchase market continued to be very active and prices followed a similar development as the charter market. With those very much improved price levels, some vessels just purchased about a year ago reappeared for sale as the new owners were trying to cash in on the rising market.

Vessel transactions regarding the Caribbean market also followed the general trend of small containerships being sold from German tramp owners to Greek or Norwegian interests or directly to the liner operators. A common feeder operator bought a standard 1,700 teu ship from German owners for their WCSA service. The sale of one 1,300 teu geared, high reefer ship was also noticeable as it was the first out of 34 ships in this category that changed hands from tramp to liner ownership. Additionally, the ship was even positioned from Asia to trade in the Caribbean. A further 1,300 teu ship was sold from German interests to a South American operator who will employ her in an ECSA service.

The newbuilding market, too, experienced strong activity in the feeder segment. More than 50 ships were ordered during the summer; the focus, however, was almost exclusively on gearless 1,800 teu and 2,800 teu ships designed for intra-Asia trades. Furthermore, most orders are directly for liner accounts and will at best release older charter ships once the newbuildings are delivered. Since the intra-Asia market provides the strongest volume growth, though, it remains questionable whether the ships will be available for other trading areas in the future.