Container Shipping: What next for the smaller TEU fleet? (Part 2)

The smaller TEU vessels have struggled to find a logical home since the Panama Canal expansion as logistics companies are utilizing the neo-Panamax gauge for economies of scale. This leaves the 1,000-4,999 TEU fleet to face the continued conundrum of meeting their commitments to their financiers through vessel employment revenues or, failing that, selling those vessels for scrap.

In 2016 the seeds were sown by slaughtering a steady flow of workhorses reducing the overall size of the herd. Yes, there remains an inherent oversupply but this should not prevent the 2017 container market leaving the Southern Ocean’s rough seas and sampling the calmer Mediterranean morning waters by focusing on meeting customer needs and providing a focused, flexible approach.

A good example is the Polyethylene (PE) industry, which relies on the container market to ship its goods globally. For US PE exports, the Port of Houston is one of the main hubs. And as such it sometimes suffers from a bottleneck of a very important resource – empty containers. When there is a lack of those, the agile delivery of goods becomes problematic.

One of the logistical solutions to that may be provided by the smaller TEU vessels that can berth in shallower ports. This creates alternative destinations for the inland trucking and rail networks thereby assisting PE producers in scheduling their export programs more efficiently. In particular the ports of Charleston, Savannah, or New Orleans normally have adequate levels of empty containers.

It is not about chasing the lion’s share of the business, but being agile enough to provide solutions to PE producers quickly when additional capacity appears and a potential arbitrage opportunity presents itself.

A similar opportunity may present itself in the EU sugar market. A recent change in the EU’s Common Agricultural Policy to end the sugar quota system on October 1, 2017 could lead the EU to become a net exporter for the first time since 2006.

Before the quota system was introduced the EU sugar market averaged exports of around 5 million metric tons white value (mtwv) a year. The first EU sugar production estimate post quotas for 2017-18 is seen at 18.32 million mtwv. Estimates of 2 million-3 million mt exports seem realistic for the 2017-18 crop year. The main producers and likely exporters are located within the UK Continent, as shown in the chart below.

The incentive for exports is also boosted by high logistical costs to truck sugar across the EU, compared to the lower container freight rates within the UK Continent to importers such as North Africa and the Middle East, which are not really the busiest stops for the large liner service vessels. That means that smaller ships could yet again step up and offer such customers a quick solution for delivering extra European sugar, when extra volumes kick in.

Also, as the EU assumes the mantle of sugar exporter, its main suppliers, namely Mozambique, Fiji and Laos, could be forced to find alternative homes for their product. This may again create a small window of opportunity for flexible container ships that can call outside the liner trade highways on demand.

Adaptability comes in many forms and being agile is essential for the US Midwest shredded scrap industry to ensure they take advantage of pricing arbitrages. During 2016 the month-on-month price change saw some big swings alongside increased scrap demand into Turkey.

Arbitrages open and close quickly as waiting for the scheduled liner service to load, and then stop off at numerous ports on the way, could be the difference between a profit and a loss. The typical lot size sold and shipped on containers is 40,000 mt, equivalent to roughly 1,500 FEU. When required to do so by scrap buyers, smaller TEU vessels are capable of loading an entire cargo and sail direct to the nominated port, thereby allowing the intermediaries to pass on these potential efficiencies to their customers in their part of the supply chain.

The smaller TEU vessels in particular have to take advantage of the commodities that require a reactive export or import program where the larger TEU vessels can’t monopolize the trade routes.

Contact the author Andrew Scorer at: andrew.scorer@spglobal.com