Deploying extra containerships on a liner service does not automatically mean more slots for shippers

May 18, 2023

Drewry has been vocal about the weight of the containership orderbook that is tipping the balance of the market out of carriers’ favour. But we have also been very clear that we expect carriers to take steps to mitigate this process.

When newbuild deliveries arrive (ideally beforehand), carriers have a choice to make: where to deploy them? Having selected a trade route, there are more decisions to take. Should they be added to an existing service, or an entirely new one? If they are going to an existing loop, what to do with any displaced units?

Those choices are easier in a growing market as trades will require additional capacity to match increased demand. Sadly, for carriers, now that demand is receding practically everywhere, so too are the viable cascading opportunities.

In a down market like today’s, the imperative for carriers is to find creative ways to hide effective capacity so that utilisation and freight rates aren’t compromised.

While not a novel idea, carriers are increasingly dipping into the playbook first used around the time of the global financial crisis: super-slow steaming. More and more, we are seeing extra ships being added to existing services, extending round voyages, but crucially not the amount of effective capacity of the service.

The latest to adopt this strategy is the 2M carriers Maersk and MSC, which are adding a total of nine ships to eight Asia-Europe (including Med) services.

Increasing the number of ships without increasing the effective capacity might seem counterintuitive, so we’ve drawn up a quick example to demonstrate how it works, see chart below.

Figure 1: How to hide containership capacity

Note: * Based on a fixed-day-weekly end-to-end westbound Asia to North Europe service with no wayport / intermediate calls; assumes High-Cube capacity reduction of 8.5% and out-of-scope reduction of 1% (differs by trade).

Source: Drewry Maritime Research

As you can see, irrespective of the number of ships deployed, so long as the average capacity remains constant and the frequency is maintained at 7 days, there will be no change to the effective capacity.

By extending the round voyage duration, either by slowing ships down or inserting new ports calls, or a combination of the two methods, carriers can find space for new ships without moving the supply-demand needle.

We’ve kept this example as simple as possible, but to arrive at the “true” effective capacity of a service and a given trade in aggregate, we would also make an adjustment for estimated capacity allocated to other routes (such as the Middle East on an Asia-Middle East-North Europe loop, known as wayports).

What we have hopefully demonstrated is that changes to the cellular fleet is only one (albeit important) variable when predicting what the real-world effective capacity will be. As the second chart shows, while the two broadly move in the same direction, there are plenty of ways and means to divert effective capacity from the path.

Figure 2: Fleet growth and effective capacity are not the same thing

Source: Drewry Maritime Research

Slow steaming is just one of the many capacity reducing measures available to carriers, sitting alongside slippage (delaying newbuild deliveries), blank voyages, demolitions and idling. While it is clearly a sub-optimal use of assets, it has its upsides, otherwise why do it at all?

Firstly, there is the aforementioned opportunity to absorb surplus ship capacity, which has the indirect potential of lifting revenues from higher freight rates (or at least preventing further erosion). Secondly, there are cost savings to be had from slowing down ships by reducing the gross service round voyage fuel intake.

Further investigation is required to see if this approach will result in better Carbon Intensity Indicator (CII) operational grades. The CII calculation is fairly simple: CO2 Emissions / (Deadweight x Distance sailed) –slower speeds will help reduce a single ship’s CO2 emissions, but it remains to be seen to what extent the reduced annual distance sailed (on account of longer round voyages) will offset that gain.

Unlike as happened in the pandemic when freight rates went into the stratosphere because capacity was inaccessible due to supply chain breakdowns, there is no danger to shippers that temporary measures such as slow steaming or blanking could on their own create sufficient shortages to drive up rates significantly. This is because, fundamentally, the capacity is stored on tap ready to be released if demand picks up, or if/when carriers lose discipline.

Our view

Carriers will utilise “inefficiencies” (less productive use of assets) to wage war on the daunting overcapacity problem. Cargo owners should prepare for longer lead times as the trend of slower services is gaining momentum.

Source: Drewry