The importance of container shipping is based on a large number of grounds. From an economic viewpoint, the last few years were conducive to high GDP growth rates worldwide. Asia in particular experienced above-average increases. The USA also recorded a respectable level of vitality in its overall economy. The relatively weak growth in Western Europe was mainly due to its poor domestic economy. European foreign trade with overseas had a considerably better trend. On balance, the global economy provided major impetus for world trade and so also for container shipping.
From an economic point of view the sector is benefiting from the further advances in international division of labour and decentralisation of production processes. The traditional industrial countries in Europe and the USA no longer choose only low-wage countries that are close by (Eastern Europe or Mexico) but increasingly also Asia. The high foreign direct investments in China alone (over USD 60 billion in 2006), which were concentrated on the industrial sector, illustrate the importance that outsourcing and offshoring now have. Within only a few years China has become the world market leader in many industrial products (e.g. refrigerators, air conditioning equipment and other consumer electronic goods). In other instances the country has further expanded its market leadership (e.g. clothing). In only a few years China will have established itself as the factory for the rest of the world; in the future this will also be the case for more technically demanding products. Nevertheless, for years to come the country will still be dependent on high technology imports. In the same way, the country’s enormous requirement for raw materials is also a result of the increasing international division of labour.
Outsourcing and global freight transport have naturally benefited from the liberalisation of world trade in the last few years. Lower customs duties and the dismantling of non-tariff trade barriers act as a catalyst for international trade. China’s entry into the WTO at the end of 2001 was an important milestone in this respect. It gave an immense boost to trade in and with the whole region. It is not without good reason that trade routes within Asia now dominate global container trade, with a share of over 28% (2004). The runners-up are trade on the transpacific route (just under 16%) as well as the routes between Europe and the Far East (over 12%). In comparison, intra-European trade (just over 7%) and the transatlantic route (about 6%) are hardly more than niche markets. The largest container ports in the world are also in Asia.
Another positive factor for container shipping is the rising proportion of goods shipped that are highly suitable for transport in containers (finished and part-finished products, as well as general cargo). In contrast, traditional bulk goods (e.g. steel, ore, coal and grain) are falling in relative importance. The transport of temperature-sensitive goods is also no longer a problem, as reefer containers have been developed. This freight structure effect, which will continue in the future, has given a lasting boost to the demand for container transport.
In addition, it is now possible to transport products in containers that, at first sight, do not appear suitable for this form of transport (e.g. certain agricultural products, chemicals and building materials). This is particularly valid for transport between countries with trade imbalances. As a result of the trade surplus China has with the USA, the demand for container capacity on the routes from China to the USA is higher than in the opposite direction. In many cases it is more economic to load containers with “unusual” goods on the return journey from the USA to China than to transport them empty.
Specific advantages of container shipping
As well as the economic and structural reasons that favour the demand for container transport, on the demand side there area number of specific advantages of this form of transport. Shorter loading and unloading times, compared with traditional cargo ships, and better opportunities for onward transport are particularly decisive factors behind the great success of container shipping. These save costs and, by virtue of shorter turnaround times, reduce capacity bottlenecks in the ports. For this reason the degree of containerisation (as a proportion of the total volume of general cargo handled) has increased considerably in all the major world ports: in Hamburg, for example, from 68.6% (1990) to 96.8% last year.
Of significant importance to the strong growth of the sector, both in the past and in the future, are the continuing improvements in productivity. Ever faster and ever larger ships ply the world’s oceans. In terms of number of ships, the container fleet increased by over 180% between 1990 and 2005. The size of the fleet in terms of total container capacity (in TEU), however, expanded by 400%. During the same period, the average size of container ships increased from 1,250 to over 2,200 TEU. There are already plans for ships carrying over 13,000 TEU. According to calculations by Ocean Shipping Consultants, the cost per TEU of transport from Europe to the Far East is about 13% less when using a ship with a capacity of 8,800 TEU instead of one with only 6,800 TEU. Compared with other types of shipping, the average age of ships in the container fleet is considerably lower, at just under 11 years (in comparison: general cargo ships: 22.4 years). In relative terms this also means lower fuel costs and higher speeds.
Larger and faster ships are, however, of little aid if the expansion of port facilities cannot keep up with this speed of growth. As a result, almost all over the world, and especially in Asia, massive investments are being made in new container terminals, efficient harbour facilities and better connections to the hinterland. Nevertheless, congestion in and outside the ports – and therefore longer turnaround times – is no rarity, due to temporary capacity overloading. Even in the future, such capacity-dependent delays appear probable. Also, in the future an ever-increasing number of ports will not be able to cope with the large container ships (length, beam, draught). In the future, port operators must continue to invest heavily in improvements and expansion.
The expansion of container ship capacity in the last few years has been accompanied by a relatively moderate trend in charter- and freight rates for container shipping. From a long term viewpoint, the prices of new container ships have also remained under pressure – due, amongst other things, to subsidies and global overcapacity in the global shipbuilding industry. This has stimulated the demand for container shipping. However, in the last two or three years, charterand freight rates, as well as the building costs of container ships, have increased considerably as a result of the strong demand (particularly in 2004 and the start of 2005). Bottlenecks at ports and with container ships were behind the upward tendency in prices; as much as were the shipyards’ full order books. Annual rate increases in higher double figures have been noted since 2003. However, since around the middle of last year, charter- and freight rates, at least, have passed a turning point, after which they have fallen considerably.
Container shipping will grow by 9% p.a. until 2010
The prerequisites for further high activity in container shipping are in place. On the demand side, the reasons already stated also argue for high future growth rates. It can be expected that the emerging Asian countries, Latin America and Eastern Europe will be even more strongly linked to the global value chain. The demand for higher value manufactured goods from the west is growing with increasing incomes in these regions. In many cases container ships are ideal for the resulting trade traffic. Drewry is forecasting an average growth of over 9% p.a. in container handling up to 2010. This means that growth rates in the next few years will ease slightly, from a high level. Even up to 2015, we expect an average growth of 9% p.a. in container handling. For these reasons, inter alia, the high levels of activity in the last few years will therefore not be sustainable: they were largely due to the exceptionally high growth in Chinese ports, which due to base effects,cannot be sustained in the longterm.
Considerable expansion of capacity in sight
On the supply side, the anticipated massive expansion of the global container fleet is the main argument for further growth.The plans are forthe total capacity of the fleet,measured in TEU,to increase by 50%in 2006, 2007 and 2008.As a result, nearly as much new (net) TEU capacity will come onto the market in these three years as in the six previous years, during which time the container fleet was already expanding at nearly 10% p.a. The low average age of the container fleet means that the number of older ships being scrapped will remain low in the near future. The focus of the order books is on large ships. According to BRS Alphaliner, at the start of 2006 shipyards worldwide had orders for close to 1,230 container ships, with container capacity of 4.45 million TEU (the ISL states that 1,158 ships were on the order books at the start of 2006). More than half of the capacity is in ships with a size of 5,000 TEU and over. The total order books are equivalent to 54% of the size of the fleet currently in service. As deliveries will take place in 2006 and the following two to three years, the expansion of capacity will meet demand that, although still strong, is expanding more slowly than in the last few years. An excess of supply is therefore inevitable.
Freight rates under considerable pressure
As a result of the expected oversupply in container ship capacity, charter- and freight rates will remain under pressure in the next months. Some market watchers even expect that the rates will remain at a comparatively low level until early 2008. In the last 12 months rates have clearly fallen. However, in longer-term comparison they are still at a more than reasonable level. The HARPEX, an aggregated index of charter rates from the shipbrokers Harper Peterson & Co., is 40% lower than the record high in March 2005. Despite that, its absolute value is still twice as high as at the beginning of 2002, when it reached its lowest rate ever. Overall, the cyclical trend of prices is typical of a sector that has relatively long lead times between ordering new capacity and its delivery.
Port capacity: a reason for bottlenecks
Most market watchers expect that charter- and freight rates will suffer only moderate decreases in the next two to three years. In fact, there are several reasons why they will fall much less sharply than they did in 2001 and 2002. For instance, in the next two to three years, part of the overcapacity will be absorbed in capacity bottlenecks at major ports. As some harbours (e.g. on the west coast of America) are already almost chronically overloaded, in many cases in the past ships have had to wait outside harbour for several days before they could be unloaded and then take on a further cargo. These long waiting times tied up shipping capacity, which was not then available for other transport. In addition, in the future some ports will not be able to satisfy the requirements that result from the use of the large container ships. These concern e.g. the maximum draught; the capacity of the terminal and storage; and sufficiently good and fast connections to the hinterland.
As the current focus of ship orders is indisputably on large container ships, there could be temporary or regional bottlenecks in ships that are principally used for feeder services. OSC is already talking of a shortage of such capacity. In the future there will once again be increased orders for smaller
ships, as, on average for the existing fleet, the older the ships are the smaller they are. On economic reasons, replacement purchases are more profitable than they would be for newer, larger ships. Shipyards in Europe could benefit from this, as the Korean and Japanese producers are obvious market leaders in large container ships.
Trade imbalances between important maritime countries and an increasing proportion of longer transport routes also tie up capacity and could therefore partially offset the surplus of supply. For example, the demand for containers to be transported eastwards across the Pacific outstrips the demand for container capacity in the other direction by 2.5 times. This inevitably results in a high proportion of empty containers that are not available for other transport.
On balance, it is clear that, until 2008, overcapacity in global container shipping is inevitable. Bottlenecks, particularly in port facilities, and other factors are reasons against a massive decline in charter- andfreight rates. The demand for container transport will continue to expand much more strongly than other major types of shipping in coming years.
From an economic point of view the sector is benefiting from the further advances in international division of labour and decentralisation of production processes. The traditional industrial countries in Europe and the USA no longer choose only low-wage countries that are close by (Eastern Europe or Mexico) but increasingly also Asia. The high foreign direct investments in China alone (over USD 60 billion in 2006), which were concentrated on the industrial sector, illustrate the importance that outsourcing and offshoring now have. Within only a few years China has become the world market leader in many industrial products (e.g. refrigerators, air conditioning equipment and other consumer electronic goods). In other instances the country has further expanded its market leadership (e.g. clothing). In only a few years China will have established itself as the factory for the rest of the world; in the future this will also be the case for more technically demanding products. Nevertheless, for years to come the country will still be dependent on high technology imports. In the same way, the country’s enormous requirement for raw materials is also a result of the increasing international division of labour.
Specific advantages of container shipping
Larger and faster ships are, however, of little aid if the expansion of port facilities cannot keep up with this speed of growth. As a result, almost all over the world, and especially in Asia, massive investments are being made in new container terminals, efficient harbour facilities and better connections to the hinterland. Nevertheless, congestion in and outside the ports – and therefore longer turnaround times – is no rarity, due to temporary capacity overloading. Even in the future, such capacity-dependent delays appear probable. Also, in the future an ever-increasing number of ports will not be able to cope with the large container ships (length, beam, draught). In the future, port operators must continue to invest heavily in improvements and expansion.
Container shipping will grow by 9% p.a. until 2010
argument for further growth.The plans are forthe total capacity of the fleet,measured in TEU,to increase by 50%in 2006, 2007 and 2008.As a result, nearly as much new (net) TEU capacity will come onto the market in these three years as in the six previous years, during which time the container fleet was already expanding at nearly 10% p.a. The low average age of the container fleet means that the number of older ships being scrapped will remain low in the near future. The focus of the order books is on large ships. According to BRS Alphaliner, at the start of 2006 shipyards worldwide had orders for close to 1,230 container ships, with container capacity of 4.45 million TEU (the ISL states that 1,158 ships were on the order books at the start of 2006). More than half of the capacity is in ships with a size of 5,000 TEU and over. The total order books are equivalent to 54% of the size of the fleet currently in service. As deliveries will take place in 2006 and the following two to three years, the expansion of capacity will meet demand that, although still strong, is expanding more slowly than in the last few years. An excess of supply is therefore inevitable.
As a result of the expected oversupply in container ship capacity, charter- and freight rates will remain under pressure in the next months. Some market watchers even expect that the rates will remain at a comparatively low level until early 2008. In the last 12 months rates have clearly fallen. However, in longer-term comparison they are still at a more than reasonable level. The HARPEX, an aggregated index of charter rates from the shipbrokers Harper Peterson & Co., is 40% lower than the record high in March 2005. Despite that, its absolute value is still twice as high as at the beginning of 2002, when it reached its lowest rate ever. Overall, the cyclical trend of prices is typical of a sector that has relatively long lead times between ordering new capacity and its delivery.
be absorbed in capacity bottlenecks at major ports. As some harbours (e.g. on the west coast of America) are already almost chronically overloaded, in many cases in the past ships have had to wait outside harbour for several days before they could be unloaded and then take on a further cargo. These long waiting times tied up shipping capacity, which was not then available for other transport. In addition, in the future some ports will not be able to satisfy the requirements that result from the use of the large container ships. These concern e.g. the maximum draught; the capacity of the terminal and storage; and sufficiently good and fast connections to the hinterland.
ships, as, on average for the existing fleet, the older the ships are the smaller they are. On economic reasons, replacement purchases are more profitable than they would be for newer, larger ships. Shipyards in Europe could benefit from this, as the Korean and Japanese producers are obvious market leaders in large container ships. 
Bottlenecks, particularly in port facilities, and other factors are reasons against a massive decline in charter- andfreight rates. The demand for container transport will continue to expand much more strongly than other major types of shipping in coming years.
