Container Shipping – Steady As She Goes

Container shipping rates have been hitting multi-year highs. While the demand side absolutely deserves its 15 minutes of fame and headlines, here we review the supply-side conditions which had been setting up as a complimentary backdrop for several years by reviewing the conclusion from our latest Container Shipping Supply Side Report.

The forecasted supply side correction in small to midsized vessels was leading to a tighter market as we entered 2020. The pandemic created a short run disruption in this part of the cycle, but the structural outlook remains intact as the economy enters the normalization phase.

In fact, an argument could be made that the longer run was likely improved as an aversion to newbuilding was sustained for several months while demolitions responded to the short-term rate environment.

Source: Clarksons SIN

This reactionary demolition activity permanently removed ‘on the water’ tonnage beyond what would have typically happened in a normal market. Additionally, lack of newbuild activity translates into a similar type of removal years from now for tonnage that will never come to be, or was at least pushed back by a year or two.

In this regard, the short-term shock of the pandemic likely had some longer-term impacts on the supply side, meaning we are facing an even better structural supply side outlook for the smaller to midsized vessels than when we entered 2020.

Except for the ULCVs, the container segment will be benefitting again from a very manageable number of deliveries combined with adequate demolition prospects. This should continue to support the supply side driven trend of higher rates we have witnessed since Q2 of 2017.

Source: VesselsValue

Owners have jumped back in the S&P market with an eye on midsized classes causing asset values to rise significantly. While we saw some impressive gains in 2020, we should see further asset appreciation this year as vessel prices have likely yet to fully adjust to the recent and rapid charter rate rebound, which has led to multi-year highs. This also implies that asset values have yet to take into account 2021’s projected further improvement.

Newbuild activity among these classes remains subdued and if it does begin to pick up those new launches several years from now will be met with a very accommodative market thirsty for tonnage. Let’s also not forget that the Post-Panamax class may not have many demolition prospects now, but just a couple years out things begin to shift pretty drastically in that class placing dozens upon dozens of these larger vessels into retirement eligible territory.

Source: Data Courtesy of VesselsValue – Chart By Value Investor’s Edge

The small to midsized container segments are now a few years along on their supply side driven market correction and (with the exception of the pandemic) things appear to be progressing as forecast.

Source: Clarksons

Best of all, the container segments are now offering current confirmation of age-old supply-side driven market cycle dynamics providing some much-needed confidence following such horrific bear markets.

As long as these supply side dynamics remain favorable, we can expect the market to continue the current path it is on – provided the demand side holds up its end of the bargain.