The impending new tonnage “explosion” threatens the container ship charter market

Until recently, the charter market for mid-size and large container ships has been relatively unscathed by the liner shipping downturn, but one maritime consultancy believes “a significant drop in charter rates is imminent”.

In July horizon In a report, Maritime Strategies International (MSI) believes that the erosion of daily rental rates and shortening periods, which has already impacted charter contracts for small container ships, will soon spread to larger ship facilities.

“A major reason for this — aside from the overall sluggish cargo demand — is that when the avalanche of very large ships hits the water, numerous medium-sized ships are shifted from the main routes to other routes typically served by smaller units, requiring subordinate ships to absorb the displaced assets on a larger scale,” MSI said.

According to the adviser, this forced cascading of larger vessels onto secondary trades that do not justify modernization may result in “increased idle time” only partially offset by slower steaming and an increase in scrapping.

MSI said the supply side is expected to “explode” over the next three quarters, with around 2.4 million TEUs of newbuild tonnage expected to be delivered by the end of the first quarter next year.

The scrapping forecast of 380,000 TEU for this year is “clearly not enough to compensate for the growing overcapacity,” it said. MSI added, “Under these circumstances, the best case scenario for freight rates is to remain only marginally at current levels of increase.”

And the impact on charter rates is grim. MSI said it expects daily rental rates to drop significantly “no later than October” across all sizes.

It said: “Ongoing delivery of the order book is likely to shift the market balance in favor of the charterer, leaving owners with no choice but to repair their vessels, likely for shorter periods of time.”

So far, the lack of open vessels in the medium and large sector of the container ship charter market has prevented shipowners from tracking down the ocean freight market, allowing brokers to continue to achieve historically high rates and long periods.

Additionally, lines with excess capacity and high exposure to the charter market have been able to sub-lease vessels to other lines at break-even levels or small discounts on daily contract rates – but even that is ending as tonnage procurement officers now have to obtain top-level approval before chartering vessels.

Meanwhile, MSI said the liners’ profitability margins are now “shrinking at an alarming rate.” According to the preliminary results of the second quarter, some shipping companies were “already in the red”.

“This is expected to worsen in the second half of the year as any new contracts signed in May and June at much lower rates than a year ago will show their impact on liner profitability,” MSI said.

“At the same time, however, operating costs for shipping companies have increased significantly compared to pre-pandemic standards, meaning current freight rate levels are loss-making for smaller vessels,” it said.

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