Container Shipping’s Turning Point for ULCVs

2021’s macro-outlook will be defined by a 5.5% approximate increase in cargo demand compared to approximately 3% net capacity growth. The vast majority of that capacity growth is projected to take place in the ULCV (vessels over 15,000 TEU) while the medium to smaller classes will see very little in comparison.

Furthermore, 2021 will be the first time in many years where the overall difference between demand and supply represents the first non-negative balance. 2018 witnessed 3.6% cargo mile demand growth against 5.1% capacity growth, making for a negative -1.5% balance. 2019 was an even tougher year with 1.7% cargo mile growth against 3.6% total capacity growth leading to a -1.9% balance. Finally, 2020 witnessed negative cargo mile demand growth of -1.1% and fleet capacity additions totaling 2.5%, making for a -3.6% balance.

Of course, these negative balances go back even further than 2018, as the capacity influx of ULCVs was in full swing by 2016.

Unfortunately, for the ULCV class, this positive balance means very little as we are still expecting approximately 14% fleet growth against just 8% cargo mile demand growth. This discrepancy is the highest among all classes, leading to rightful speculation that the recent gains (regarding both charter and freight rates) are the most fragile. Fragile not just because of the incoming tonnage, but the relative price increases compared to other routes.

As of February 2, 2021, the trailing 12-month growth rate for ULCV cargo mile demand comes in at 13.86%, but this encompasses some very spectacular Q3 and Q4 numbers. Obviously, the figure of 8% cargo mile demand growth in 2021 implies some slowing ahead. With Q1 of 2021 showing a projected 10.55% year over year improvement, we may be seeing a bit of that slowing taking place. This isn’t to downplay a very promising 8% projected improvement so much as it is to temper expectations against the early 14% trend as of late being a sustainable market trend.

Let’s also take a minute to examine the ever-changing footprint of the ULCV class. While the Asia to Europe route had been the mainstay of these behemoths, their permanent presence is growing of the east coast of Asia, where the utilization of these vessels has seen a sharp increase for intra-Asian trade.

While these are much shorter voyages, they are contributing to cargo mile demand in a very big way with the sheer number of voyages being undertaken. Furthermore, we cannot discount the numerous port days spent loading and unloading these massive ships.

Others have taken notice of this type of utilization with areas like NW Europe and the Mediterranean seeing a greater ULCV presence to conduct regional trade.

The growth along these alternative routes is why we expect cargo mile demand growth at 8%, which is beyond the 5% forecasted for just the Asia to Europe route.

In fact, it’s noteworthy that over the last six months, three out of the top six contributors to ULCV cargo mile demand were from regional trading routes and they have been seeing some very solid growth.

From August 4, 2020 to February 4, 2021, the SE Asia to SE Asia regional route contributed about 14% to total ULCV cargo mile demand. The SE Asia to East China Sea route contributed nearly 6% while the East China Sea to SE Asia route accounted for just over 4%.

Together, these top three intra-Asia regional routes compose nearly 25% of total cargo mile demand and for the most part have been growing at a more robust pace as of late than the traditional Asia to Europe routes.

Using the same six-month period cited above for year over year comparisons, VesselsValue’s data shows that the SE Asia to SE Asia route grew by 17%, the SE Asia to East China Sea route grew by 22%, and the East China Sea to SE Asia route grew by 13%. As the chart below shows, these recent gains aren’t anomalies, but established trends which are now beginning to exert their influence in a growing fashion.

Source: VesselsValue – SE Asia to E. China Sea ULCV Cargo Miles

Recently, the collective cargo miles posted for these three regional routes eclipsed the predominant SE Asia to NW Europe route and backhaul route. This means the fate of ULCV trade is seeing a greater weighting toward the Asian economy as opposed to European consumption.

This brings both route diversification and greater exposure to hotter Asian markets which should factor into the forward outlook on an increasing scale moving forward.

This also leads to the conclusion that cascading has not fully run its course in the global market. While the Asia to Europe route was saturated with ULCV tonnage years ago, pushing smaller vessels to alternate routes, that cascading effect is still being seen in this intra-Asia trade as well as others, such as NW Europe, Mediterranean, Baltic, MEG, and Red Sea routes.

While that bodes well for absorbing the ULCV glut, it reduces demand for smaller vessels which previously served those trade lanes. This should be factored into the longer-term outlook for small to midsized container vessel demand.

Serendipitously, as the trend toward utilizing larger ships grows across the board, the sub-15,000TEU vessels will see this trend complimented by deliveries concentrated in larger classes while negative fleet growth in the smaller classes in the coming years is almost assured. This negative fleet growth will allow slightly larger vessels to cascade through the trade lanes more naturally.