Literature Review:

Liner shipping industry is a very dynamic and price sensitive industry and is largely related to trade of commodities, or generally economic growth of nations. Increase in trade during last decade from 2001 to 2014 has led to a sharp increase in container trade with few slowdowns during depression and recession periods. Containerships size has also seen a growing trend over the last decade with over 18000 TEU [AS1] containerships being continuously build during recent years.

Though container trade growth has continued to expand strongly, the containership sector continues to face supply management issues which have been there since the steep decline in trade volumes from 2009. According to Clarkson research, global container trade was expected to increase by 6.0% in 2014 to reach 170.9m TEU, following a growth of 4.9% in 2013. There has been significant growth on both the mainlane and non-mainlane trade routes throughout world. Global container trade growth is projected to accelerate further in 2015 to 6.7% amidst challenging margins in the industry. In recent years, operators have used both idling and slow steaming as means of absorbing excess capacity. Whereas the idle fleet has declined this year to the lowest level since 2011, still there is around 1.3% of total fleet capacity in lay-up. For the meantime, there remains a mismatch between those trade lanes which are exhibiting the strongest growth and the size of vessels on the order book.

Liner Shipping Fleet Overview

Ro-Ro Market

The Ro-Ro [AS2] market remains under pressure, although there has been an improvement in benchmark time charter rates so far this year. By late September 2014, the 1 year time charter rate for a large 3,500 4,000lm Ro-Ro had risen to $14,250/day, up from $11,000/day at the end of 2013. The benchmark rate for a 2,000- 2,500lm vessel has also improved marginally to $9,750/day, up 8% since the start of the year. However, rates remain at historically low levels. Meanwhile, the guide price for a 5 year old c.2,400lm Ro-Ro stood at $33.3m at the end of August 2014, down 2% since the start of the year, and still around 25% below the 10 year historical average.

In the PCC [AS3] market, time charter rates are still significantly lower than pre-recession levels.

However, there has been a slight improvement in market conditions so far this year, with the 1 year time charter rate for a 6,500 ceu [AS4] PCC standing at $25,500/day in August 2014, up 10% on the 2013 average. Nevertheless, this compares with levels as high as $40-50,000/ day in 2007/08, when the PCC supply/demand balance was significantly tighter.

Ro-Ro cargo volumes have remained under pressure in key markets. Volumes on the intra- Europe trade, where a large proportion of Ro- Ro vessels are employed, suffered severely in 2009 and have yet to fully recover. Nevertheless, a number of key ports in the Northern European range saw a slight improvement in Ro- Ro cargo volumes last year. Further growth in volumes has been recorded so far in 2014, with Ro-Ro volumes at Zeebrugge up 6% y-o-y in the first half of 2014, and at Rotterdam by 8% y-o-y, both reportedly reflecting improvements in the UK economy. Meanwhile, the PCC sector suffered a dramatic downturn during the global economic recession, but seaborne trade in cars has bounced back since 2009, although volumes still remain slightly below pre-recession levels. In 2013, seaborne car trade grew by an estimated 3.9% to 21.4m cars, despite relatively weak exports from Japan and Korea, the two largest exporters. Trade growth has been held back somewhat this year by relative weakness in exports from the major Asian manufacturers, as relocation of production to developing countries has continued. However, car sales have continued to grow robustly in many developing regions, supporting overall import growth.

Trade volumes appear to be improving in both the Ro-Ro and PCC sectors this year, and the lack of strong fleet growth expected in the short -term could support more positive market fundamentals and reduce oversupply. While seaborne car trade growth has been held back recently, improving demand in Europe and the US, in addition to the further diversification of car importers and producers, should support continued trade growth. Meanwhile, the Ro-Ro sector is likely to be significantly affected by the introduction of more stringent emissions limits in the European ECA from the start of 2015.

Operators have so far appeared fairly hesitant to retrofit older vessels to meet the new limits, and this could lead to further scrapping of older vessels, and ordering of more ‘eco’-vessels in the short-term.

MPP/General Cargo

MPP/General Cargo vessels traditionally carry both break bulk [AS5] and container shipments. However, some cargoes which have historically been carried by the MPP fleet are increasingly being shipped by other vessel types, as competition for cargo volumes has proved fierce ever since the onset of the downturn. MPP vessels are designed to carry a flexible range of cargoes, and as such tend to operate in areas which fall outside the mainstream scope of the demanding infrastructure requirements of the fully cellular container routes in terms of the commodities they carry and the geographical regions in which they trade.

MPP and general cargo market conditions have remained challenging in recent years. In August 2014, the benchmark 1 year time charter rate for a 17,000 dwt (900 TEU) MPP stood at $7,500/ day, down 10% from the 2013 average, and down 34% from the ten year historical average of $11,334/day. However, the rate for a smaller 9,000 dwt vessel has shown some improvement in recent months. Overall, 2013 was a difficult year for MPP operators, with break bulk and project cargo volumes reported to be relatively weak, while competition with other vessel types remained strong. Oversupply in the container and bulk carrier markets has contributed to this, as has the further containerization of breakbulk cargoes. However, some major European ports have reported an increase in breakbulk throughput so far in 2014. Competition with other vessel sectors is expected to continue to affect the MPP [AS6] and general cargo sectors. While some cargo which does not fit in standard containers is increasingly being carried by containerships (as operators continue to face supply pressure), MPPs retain a competitive advantage when it comes to the handling of heavy-lift and industrial cargoes. Ships with higher specifications are generally more likely to find employment, and as a result operators are likely to continue to focus investment into such vessels. Overall, the MPP and general cargo sectors are expected to remain under pressure in the short-term, although the outlook for demand is improving slightly, supported by economic growth in developing countries and expected growth in project cargo volumes. Meanwhile, fleet expansion is expected to continue to be relatively limited.

Sub-3,000 TEU containerships
Containerships in the sub-3,000 TEU sector face increased competition on the intra-regional trades from the ‘cascading’ of larger box ships. Charter earnings in the sector are up in the year to date compared to full year 2013 but remain in the doldrums in historical terms. Charter earnings for a gearless 2,750 TEU box ship have averaged $7,217/day in the year to date, a rise of 6% compared to full year 2013.

Secondhand prices for this sector have fallen in the year to date compared to end 2013 with the price of a 10 year old 2,750 TEU box ship falling 10% to $9.25m. The idle fleet in the sub-3,000 TEU sector looks to have averaged over 100 vessels in the year to date, around 3-4% of the sector’s overall capacity. With the majority of the idle vessels charter owned, owners are struggling to find much upside in earnings. Meanwhile, rates for boxes shipped from Shanghai to West Japan averaged $343/TEU in the first eight months of 2013 but for the same period in 2014 they averaged just $310/TEU.

August freight rates on intra-Asian trades in general were seemingly at historical lows. Intra-Asian trade in full year 2014 is expected to total 48.2m TEU which will account for 28% of overall container trade and much of the deployment of sub-3,000 TEU units. These volumes are amongst the fastest growing in the container sector and are expected to have grown in volume by 48% between 2009 and 2013 and by 7.7% in 2014. They are projected to expand by around 8% again in 2015. A significant number of sub-3,000 TEU vessels, in general a little smaller than those employed within Asia, are also employed on the intra- European trades which are growing more moderately than those intra-Asia, at around 3.5% in 2014.

Whilst the intra-regional trades, led by intra- Asia, are projected to exhibit strong growth in the years ahead, supply challenges, resulting from the idling of capacity and the ‘cascading’ of relatively larger tonnage into the small box ship arena, are currently exerting downward pressure on charter rates. However, the challenges of operating larger vessels on the intra-regional trades, including less advanced infrastructure at some ports, is likely at some point to provide a barrier to the further cascading of additional larger containerships into this sector. In time, the charter market environment in this segment should finally see some protection from the source of the current pressure, and an eventual improvement. This is likely to be a result of an improving supply demand balance for the containership sector as a whole backed by cumulative volume amelioration, in addition to the thin orderbook in the smaller sizes and the shrinking fleet in this sector driven by elevated demolition volumes.

3000-8,000 TEU containerships
The 3,000-8,000 TEU sector includes both Panamax and Post-Panamax vessels. Post- Panamax containerships, whose dimensions are too large for the current Panama Canal, are deployed across on a wide range of routes, including mainlane, North-South, and non-mainlane East-West routes. Deployment of Panamax vessels is also diverse. Cascading of larger vessels onto non-mainlane routes has exerted pressure on some freight rates this year. In the first eight months of 2014, freight rates on the Shanghai-Santos route averaged $1,100/TEU, down 20% on the full year 2013 average, while rates on the Shanghai-South Africa route fell 14% to $693/TEU. While there has been an improvement in Panamax charter rates in recent months (particularly relative to other box ship segments), they remain at historically depressed levels. By the end of September, the 1 year TC rate for a 4,400 TEU Panamax vessel had reached $10,500/day, compared to an average of around $8,700/day in 2013, but still down 53% from the 10-year historical average. Meanwhile, the 3 year TC rate for a 6,800 TEU Post-Panamax vessel has fallen slightly this year, averaging around $24,500/day in January-August, down 11% from the 2013 average.

North-South container trade is expected to grow by 5.7% in full year 2014 to total 30.5m TEU. The fastest growing of these trades are those between Africa and the Northern Hemisphere which are projected to grow by 6.1% y-o-y in full year 2014 to 10.5m TEU. The intra-Asian trades, where Panamax vessels have been redeployed in greater numbers than many expected this year, are set to grow 7.7% y-o-y in full year 2014, to a total of 48.2m TEU. At the start of 2014, around 70 Panamax vessels were estimated idle, but the figure is now reported to be significantly lower.

Whilst more Panamaxes have been able to find greater employment on the intra-regional trades than initially thought this year, the ability to continue this cascade down the route hierarchy is likely to be finite. However, Post-Panamax containerships in this sector are likely to find more employment opportunities on fast growing North-South trades, and the transpacific trade traversing the expanded Panama Canal. These deployment growth opportunities combined with limited fleet expansion could create a supply deficit for vessels of this type.

8,000-12,000 TEU containerships

The 8-12,000 TEU sector continues to grow strongly, as these vessels offer relatively flexible employment options. Most vessels in this sector are currently deployed on Transpacific and Far East-Europe trades, but an increasing number are also employed on non-mainlane trades, for example North-South Operators have continued to slow steam services on these routes in order to reduce costs and alleviate some supply pressure. Average freight rates for boxes shipped from Shanghai to the US West Coast have averaged $1,978/FEU in the first eight months of the year, down 5% from the 2013 average. However, freight rates for boxes shipped from Shanghai to the US East Coast have improved this year, supported by some carriers diverting shipments from the West Coast where docker contract negotiations are leading to issues. Freight rates to the USEC averaged $3,565/FEU in the first eight months of the year, up 7% on the 2013 average. Meanwhile, the three year charter rate for a 9,000 TEU containership has remained relatively stable so far this year, averaging $39,444/day in January-August 2014. The newbuilding price for a 8,500 TEU containership has risen marginally since the start of 2014 to reach $88m at the end of August, while the price for a 5 year old 8,800 TEU vessel has softened by 3% to reach $65m.

Transpacific container trade has grown strongly so far this year, largely owing to US economic improvements. During the first seven months of 2014, peak-leg Transpacific volumes between Asia and North America were up by 5.1% y-o-y, and are projected to total 14.6m TEU in the full year. This represents faster growth than the 4.2% expansion in 2013, and 0.5% growth recorded in 2012. Meanwhile, North-South volumes are expected to increase by 5.7% in full year 2014, and by 7.0% in 2015, although Latin American volumes, key for this sector, look set to grow a touch more moderately.

The 8-12,000 TEU fleet is expected to continue to grow strongly, with capacity expansion of around 15% p.a. projected in 2014 and 2015. These vessels are likely to continue to be increasingly deployed on non-mainlane routes, such as North-South and Middle East-Indian Sub-Continent trades, as more ships are cascaded down from the Far East-Europe trade. Ships in this sector will also be capable of and well-suited to traversing the expanded Panama Canal, which is due to open in 2016. It likely that, up to a certain size, they will eventually replace Panamaxes on the Far East- US East Coast trades where they can deliver greater per TEU efficiencies. New building interest in the sector is likely to remain robust into the longer-term, as a result of ongoing fresh deployment opportunities, and the continued pressure for operators to continue to drive down slot costs across the liner network.

12,000+ TEU Containership

The 12,000+ TEU sector is the fastest growing element of the overall containership fleet. These vessels are almost exclusively deployed on the Far East-Europe trade lane, where economies of scale are perceived to offer the greatest benefits. Only a few of these ships are deployed elsewhere, as opportunities have been generally limited by lower volumes and infrastructure constraints. Firm deliveries of large vessels onto the Far East-Europe trad has kept freight rates on the route under pressure, despite operators continuing to slow steam services. While the freight rate on the Shanghai-Europe route in the year to date is up 15% on the 2013 average at $1,267/day, rates have softened in recent months to fall below $1,000/TEU. Meanwhile, the benchmark newbuild price for a 13,000 TEU boxship stood at $115.5m at the end of August, up 2% from the end of 2013.

Volume growth on the Far East-Europe trade has clearly returned to form in the year to date, further driving increased demand for 12,000+ TEU units. After shrinking by 4.2% in 2012, peak-leg volumes increased by around 4% in 2013, and have reportedly risen by 8% y-o-y in January-July 2014. This growth largely reflects continued improvement in economic performance in many European countries.

Overall, peak-leg Far East-Europe trade is projected to total 15.2m TEU in 2014, up 6.5% y-o-y. Trade on the non-peak leg from Europe to Asia is projected to increase by 3.2% to 7.0m TEU in full year 2014. Despite sprightly trade growth so far this year, the Far East-Europe trade remains a competitive environment. Supply pressures have led to volatile freight rates, increasingly encouraging operators to explore potential alliances. Following the rejection of the ‘P3’ by Chinese regulators in mid-2014, the proposed ‘2M’ and ‘Ocean Three’ alliances plan to compete on the trade lane with the existing ‘G6’ and ‘CKYHE’. Newbuilding interest in the 12,000+ TEU sector is likely to remain high, as operators continue to pursue lower unit costs and greater per TEU efficiencies.

Not all carriers have yet committed so significantly to these vessels, so many may still need to invest. Meanwhile, as the fleet of 12,000+ TEU containerships continues to expand at a rapid pace and take advantage of upsizing opportunities, delivery of these vessels is likely to continue to lead to redeployment of relatively smaller ships off the Far East-Europe trade. How operators handle the rate of this cascade will remain key for the development of freight rates on the route. Decisions by regulators over the formation of potential alliances will also have a major influence on the environment for these vessels. While a range of factors currently limit carriers’ ability to deploy 12,000+ TEU ships on the Transpacific, opportunities may eventually spread to other trades (such as the Far East-Middle East) in the long-term.

Global Containership trade

While container trade growth has continued to expand robustly, the containership sector continues to face the issues of supply management that have been present since the unprecedented contraction in trade volumes in 2009. Global container trade is expected to increase by 6.0% in full year 2014 to reach 170.9m TEU, following expansion of 4.9% in 2013. In the year to date, there has been robust growth on both mainlane and non-mainlane trade routes. Intraregional trade is expected to expand robustly this year, with the intra-Asian volumes projected to grow at a rate of 7.8%. In particular, trade growth on the Far East-Europe and Transpacific routes has returned to form faster than initially expected, supporting the projection of growth of 4.9% in total mainlane trade in full year 2014. Global container trade growth is projected to accelerate further in 2015 to 6.7%.

The Far East-Europe peak leg trade grew robustly at 7.7% in 2014, and it is expected to expand by 6.4% in 2015. Having grown by 6.3% in 2014, expansion on the peak leg Transpacific route is expected to accelerate slightly, to 7.0% this year. This should contribute to a broad base for global demand growth in 2015. The container capable fleet is expected to expand by 5.8% in 2015, to 21.6m TEU. Fully cellular fleet capacity, which rose by 6.4% in 2014, is expected to expand by a further 6.4% in 2015, to 19.4m TEU, with 1.5m TEU of containership capacity expected to be delivered this year.

The fully cellular containership orderbook numbered 440 vessels of a combined 3.3m TEU at the start of 2015, equivalent to 18.0% of total fleet capacity. The orderbook is dominated by very large vessels, with the 12,000+ TEU sector accounting for 61% of total orderbook capacity (Section 4). Delivery of these boxships is expected to reach 0.7m TEU in 2015. • As a means of managing oversupply, running capacity growth has been curbed by the extensive adoption of containership slow steaming, which is estimated to have absorbed around 2.5m TEU of nominal capacity. Despite the recent fall in bunker costs, so far there has been no clear or significant increase in vessel speeds. Boxship idling fell last year, to reach 0.2m TEU at end 2014, equivalent to 1.3% of fleet capacity.

After a record year for demolition activity in 2013, 0.38m TEU was sold for scrap in 2014, the second highest annual level. A total of 171 boxships were scrapped last year, including 43 Panamax vessels. Following elevated demolition and limited deliveries in 2014, the sub- 5,000 TEU fleet contracted by 2% last year. Boxship scrapping is currently set to remain high in 2015, with 0.34m TEU projected to be scrapped. Global container trade is expected to continue growing at a slightly faster pace than total container capable supply in 2015. Whilst this narrow lead was established in 2014, a high number of very large containerships were delivered last year, putting pressure on mainlane operators to re-deploy relatively smaller vessels elsewhere. This is set to continue in 2015 with the same uneven distribution to the orderbook schedule. Further cascading will be needed to distribute supply across the growing trade lanes and support the freight market.

Following the approval by US authorities last year, both the 2M and Ocean Three Alliances are reported to have started services on mainlane trade lanes in January 2015 (Section 5). Mainlane freight rates typically performed slightly better in 2014, although volatility was seen across the year, particularly on the Far East-Europe route. On the Transpacific trade lanes, Asia-US East Coastrates improved in 2014, whilst rates to the US West Coast fell (Section 3). Nonmainlane freight rates generally fell below their 2013 average levels as a result of the supply pressures from the .cascade. effect.

On the timecharter market in 2014, earnings generally remained at the depressed levels at which they started the year. The notable exception was the Panamax sector which experienced a significant improvement in rates by end 2014. The charter rate index remained unchanged at 47 points throughout 2014 (Section 8). Although the idle boxship fleet is relatively low, representing 1.3% of the fleet at start 2015, the majority of this capacity is charter owned; this has maintained downward pressure on charter market earnings. However, the currently limited idle fleet combined with a thin orderbook in the smaller vessel sectors, the impact of port congestion, and a potential slowdown of the .cascade., could help the charter market environment.

Total container capacity is expected to grow by 4.8% in 2014 to total 20.3m TEU, and by 5.7% in 2015. In recent years, operators have employed both idling and slow steaming as means of absorbing excess capacity. While the idle fleet has declined this year to the lowest level since 2011, there still remains around 1.3% of total fleet capacity in lay-up. The high bunker price environment has also continued to encourage operators to slow steam services. Meanwhile, there remains a mismatch between those trade lanes which are exhibiting the strongest growth and the size of vessels on the orderbook. While non-mainlane trades are expected to continue to expand strongly, recent ordering has focused on very large containerships, typically deployed on mainlane trade routes. This has led to the redeployment of relatively smaller vessels down the trade lane hierarchy, and this ‘cascade’ of tonnage has increased supply pressure on the non-mainlane trades, significantly affecting both freight rates and the charter market.

Freight rates on many trade lanes remain volatile, reflecting continued supply pressures. This volatility is evident from the mainlane spot rates experienced in recent months. On the non-mainlanes ‘cascading’ has been responsible for freight rates on many trades falling year-on-year, despite relatively healthy trade growth on many of these routes. Although container trade expansion is set to outstrip container capacity growth in the short-term, there remains a need for liner companies to manage supply with care.

Charter owners account for 90% of current idle capacity, and the management of this idle fleet, in addition to the handling of the capacity ‘cascade’ by operators, will continue to have an effect on charter rate prospects. In addition to the containership sector discussed above, the wider liner market also includes a number of “general cargo” vessels not intended or equipped for full loads of containers, but which supplement earnings in specialist and niche cargo sectors by carrying containers.

Multi-Purpose (MPP) vessels are non-cellular (i.e. without overall provision of fixed cell guides for containers) ships with box-shaped holds and container-carrying capability. These, and the General Cargo fleet (consisting of faster “GC Liners” and smaller “GC Tramp” vessels), operate within niches across the liner industry and in an area shared with small bulkers (see our Containership Register for full definitions). Meanwhile, the Ro-Ro fleet comprises a wide range of vessels, some with cargo handling gear (Ro-Ro/Lo-Lo), others with significant accommodation for drivers and passengers (Ro- Pax). Even more specialized vessels in the generic Ro-Ro fleet are PCCs (Pure Car Carriers), which are primarily designed for and operated in the motor vehicle trades. There also remains a distinct specialized reefer fleet, despite deep incursions made by fully cellular containerships into this sector using refrigerated containers.

There has been a growth in volume on the Far East-Europe trade in 2014 as compared to 2013, which is further driving increase in demand for 12,000+ TEU container ships. After shrinking by 4.2% in 2012, peak-leg volumes increased by around 4% in 2013, and have reportedly risen by 8% y-o-y in January-July 2014. This growth largely reflects continued improvement in economic performance in many European countries. Overall, peak-leg Far East-Europe trade is projected to total 15.2m TEU in 2014, up 6.5% y-o-y. Trade on the non-peak leg from Europe to Asia is projected to increase by 3.2% to 7.0m TEU in full year 2014.

Recent demand side indicators have continued to present a mixed picture for volume growth this year. On the Far East- Europe trade, volumes fell by 4% in 1H 2015, and early indicators for July also appeared to be relatively weak. Latest year to date indicators on the intra-Asia trade also seem to be suggestive of weaker than expected expansion. While it is possible that China’s devaluation of the yuan could help to support mainlane trade volumes, the recent weak data points have resulted in a downward revision to projected expansion in global container trade in 2015, to 4.6%. Volumes on the Far East-Europe route seem likely to contract in full year 2015, and intra-Asian trade growth is now projected to ease to below 5%, from an estimated 6.1% in 2014. However, if recent economic events in China are indicative of wider distress in the economy, this could lead to increased uncertainty over trade growth projections.

Container capable supply growth is expected to reach 6.9% in 2015. The impact of the delivery of very large containerships to schedule, combined with relatively limited levels of demolition in the year so far, has driven rapid containership fleet growth, expected to reach 7.6% in the full year. Improvements in mainlane freight rates in early August proved short lived and it is expected that operators will struggle to support freight earnings for the rest of 2015, particularly on the Far East- Europe route. Whilst charter rates remained at improved levels compared to mid - 2014 at the end of July, the market appears to be softening into August. However, fundamentals seem supportive still: the sub-8,000 TEU fleet has grown by less than 1% in capacity in 2015 so far and the idle fleet represented a relatively low 1.8% of fleet capacity in late July.

Whilst containership investment in 2015 so far remains dominated by the very large sector of the fleet, several other ordering trends have appeared. A number of orders have been reported for large feeder vessels and in June and July contracts have also been placed for ships of around 14,000 TEU – vessels notably smaller than the 18-20,000+ TEU ships which made headlines earlier in the year. The 113 orders reported in the year so far comprise 37 of ships of 18,000+ TEU, 25 of 12-14,000 TEU, 14 of 8- 11,999 TEU, 18 in the 3-7,999 TEU Post-Panamax fleet and 19 in the sub-3,000 TEU class.

Seventeen boxships of 142,614 TEU were reported delivered to the fleet in July, including nine of 8-11,999 TEU and three of 12,000+ TEU. Containership deliveries in the opening seven months of the year totaled 1.0m TEU, unchanged compared to the same period in 2014. Deliveries into the sub-8,000 TEU fleet reached 0.14m TEU in the first seven months of 2015, down 27% y-o-y.

Recent data points indicate further weakness in container trade on a number of routes this year, reflecting economic challenges in Europe and China. Volumes on the peak leg Far East-Europe trade fell 7.7% y-o-y in June, and the extent of the year to date drop suggests that volumes are unlikely to rise in full year 2015. Year to date indicators also suggest that overall growth in intra-Asian volumes has been less firm than expected, and intra-Asian trade is now expected to expand by 4.8% in 2015 to 50.4m TEU. However, trade on non-mainlane East-West routes has grown robustly in the year to date, with volumes projected to rise 9.7% in 2015 to 23.7m TEU. Global container trade growth is now expected to slow slightly to 4.6% in 2015. While the recent devaluation of the yuan could support Chinese export growth, it is not yet clear whether any expansion will boost total Asian exports or offset shipments from other emerging Asian nations.

Trade lane	billion TEU Miles
Trade lane	2007	2008	2009	2010	2011	2012	2013	2014	2015(f)
North/South	148.00	159.12	148.98	173.46	191.06	195.22	204.76	212.71	222.68
Intra-Regional/Other	136.62	150.39	127.94	146.03	158.48	170.25	180.74	192.20	204.70
Far East - Europe	147.35	146.99	125.34	146.89	151.77	145.40	152.95	164.42	166.98
Non-Mainlane East/West	77.21	85.62	87.02	100.30	110.73	114.66	118.73	127.69	137.13
Far East - North America	83.10	77.46	65.75	75.59	76.08	76.48	79.67	84.67	90.12
Europe - Far East	58.21	57.48	60.13	61.93	66.58	69.45	73.26	74.33	75.48
North America - Far East	38.65	40.69	40.04	41.48	43.76	43.60	45.24	43.19	42.58
Europe - North America	11.96	10.89	9.24	10.17	11.03	11.63	11.95	13.10	14.12
North America - Europe	10.48	10.76	8.06	8.95	9.26	8.82	9.00	8.89	8.72
GLOBAL TOTAL	711.58	739.41	672.50	764.80	818.75	835.50	876.29	921.20	962.49

Despite sprightly trade growth so far this year, the Far East-Europe trade remains a competitive environment. Supply pressures have led to volatile freight rates, increasingly encouraging operators to explore potential alliances. Following the rejection of the ‘P3’ by Chinese regulators in mid-2014, the proposed ‘2M’ and ‘Ocean Three’ [AS7] alliances plan to compete on the trade lane with the existing ‘G6’ and ‘CKYHE’[AS8] . Newbuilding interest in the 12,000+ TEU sector is likely to remain high, as operators continue to pursue lower unit costs and greater per TEU efficiencies. Not all carriers have yet committed so significantly to these vessels, so many may still need to invest. Meanwhile, as the fleet of 12,000+ TEU containerships continues to expand at a rapid pace and take advantage of upsizing opportunities, delivery of these vessels is likely to continue to lead to redeployment of relatively smaller ships off the Far East-Europe trade. How operators handle the rate of this cascade will remain key for the development of freight rates on the route. Decisions by regulators over the formation of potential alliances will also have a major influence on the environment for these vessels. While a range of factors currently limit carriers’ ability to deploy 12,000+ TEU ships on the Transpacific, opportunities may eventually spread to other trades (such as the Far East-Middle East) in the long-term.

Containership market

Container trade on the peak leg Asia-Europe route contracted 7.7% y-o-y in June, reaching 1.3m TEU, according to data from CTS. Box volumes on this route have come under pressure in the first half of 2015, falling 4% y-o-y to total 7.3m TEU. Chinese exports have reportedly been weak so far this year, with the total value of exports falling 1% y-o-y in January-July 2015, and in mid-August, China devalued its currency by around 4% over three days. This could potentially help to support China’s exports, although the aggregate impact on container trade volumes is not yet clear. In contrast to the Far East-Europe route,

Transpacific peak-leg volumes have continued to show strong growth in recent months, rising by 10.4% y-o-y in June to reach 1.3m TEU. In 1H 2015, trade on this route grew 9.3% y-o-y, totalling 7.1m TEU. Data from the Shanghai Containerised Freight Index shows that spot freight rates for boxes shipped from Shanghai to Europe reached a six month high in late July, at $1,109/TEU, ahead of an August 1st general rate increase. However, rates on this route fell back to $833/TEU on August 7th, highlighting the challenges that carriers face in maintaining rate increases. On the Shanghai-Med. route, spot freight rates also surged in late July, to $1,119/TEU (a five month high) before falling to $879/TEU on August 7th. On the Transpacific route, spot freight rates for containers shipped from Shanghai to the USWC stood at $1,542/FEU on August 7th, up 17% compared to the July average. On the Shanghai-USEC route, rates reached $2,985/FEU on August 7th, up 7% compared to the July average.

On the non-mainlane trade lanes, spot freight rates for containers exported from Shanghai to Lagos reached $1,202/TEU on August 7th, down 2% compared to the July average, according to SCFI data. Rates on the Shanghai- Santos route reached $489/TEU in early August, 40% up on the July average. On the intra-Asian trades, the rate on the Shanghai- East Japan route reached $134/TEU on August 7th, up 21% compared to the July average. By late July the total containership capacity in layup reached around 0.35m TEU, according to Alphaliner. This represents 1.8% of the boxship fleet capacity. This level is slightly higher compared to late June, and represents an increase in idle capacity on ships below 3,000 TEU. Container throughput at Singapore declined by 13% y-o-y in July to 2.6m TEU, with volumes in the first seven months of the year down 5% y-o-y. Volumes at Hong Kong also continued to come under pressure in July. Throughput at the port dropped 10% y-o-y to 1.8m TEU, bringing total volumes in the year to date to 11.8m TEU, also down 10% y-o-y.

Throughput at Chinese ports rose 5% y-o-y in June, reaching 17.8m TEU, and 6.5% y-o-y in 1H 2015, to 102.5m TEU. Total throughput at the top five US East and Gulf Coast ports of Virginia, Savannah, Houston, Charleston and New York/New Jersey rose 17% y-o-y in June to 1.5m TEU, and by 15% y-o-y in 1H 2015 to 8.4m TEU. From early August the Suez Canal began operating with an additional 45-mile long parallel channel, allowing two-way traffic for the first time. The expansion ends the need for ships to wait whilst traffic passes in the opposite direction, cutting transit times (from around 18 to 11 hours), reducing fuel costs and increasing the Canal’s daily capacity. The Suez Canal Authority believes it is well placed to compete with the Panama Canal for Asian trade to the US East Coast. However, the Panama Canal Authority is due to complete an expansion project of its own in Q2 2016, with a new set of locks allowing the passage of boxships of up to around 14,000 TEU. This will allow a number of Transpacific services via Panama to deploy much larger vessels, which could deliver unit cost savings to operators. Operators CMA-CGM, CSCL, Hanjin, UASC and Yang Ming are to upsize their joint service between the Far East and the Red Sea. Ships of 8-10,000 TEU will replace the 4,700-6,000 TEU containerships currently operating on the service, increasing weekly capacity by around 50%. CMA-CGM has announced an upgrade to its EURAF 4 service operating between the Mediterranean and West Africa by adding port calls in Italy, France, Malta and Spain. Two vessels will be added to the service, bringing the total to 7 ships of 2,200-2,700 TEU.

Table 1: Global Containership Market & Forecast: By Vessel Capacity (TEU)

	2014	2014	2015	2015	2018	2018	CAGR (2014-2020)
TEU nominal	No. of Ships	Capacity (Million TEU)	No. of Ships	Capacity (Million TEU)	No. of Ships	Capacity (Million TEU)	CAGR (2014-2020)
18000-21000	15	0.27638	36	0.670972	83	1.591598	54.91%
13300-17999	81	1.147483	111	1.602973	149	2.142188	16.89%
10000-13299	169	2.021012	181	2.143846	227	2.650536	7.01%
7500-9999	404	3.527523	476	4.186473	505	4.453551	6.00%
5100-7499	501	3.086765	509	3.13746	511	3.15149	0.52%
4000-5099	745	3.378484	749	3.398562	760	3.447519	0.51%
3000-3999	255	0.883731	269	0.935613	281	0.978731	2.59%
2000-2999	649	1.650462	672	1.700657	718	1.813899	2.39%
1500-1999	575	0.981943	590	1.008029	627	1.073357	2.25%
1000-1499	679	0.789299	698	0.809919	716	0.830488	1.28%
500-999	766	0.568141	762	0.56388	764	0.56595	-0.10%
100-499	197	0.063076	190	0.060835	190	0.060835	-0.90%
TOTAL	5036	18.3743	5243	20.21922	5531	22.76014	5.50%

According to AlphaLiner, large capacity containerships, above 18,000 TEU are expected to grow fastest among overall containership fleet with over 50% CAGR in next 4 years. Vessels above 10,000 TEU are also expected to grow at a very high pace. These large capacity vessels are mainly used on Far East-Europe trade lanes, where economies of scale are perceived to offer the greatest benefits. Only very few of large containerships above 10,000 TEU are deployed on other trade routes, as opportunities have been generally limited by lower volumes and infrastructure constraints. Firm deliveries of large vessels onto the Far East-Europe trade has kept freight rates on the route under pressure, despite operators continuing to slow steam services. While the freight rate on the Shanghai-Europe route in the year to date is up 15% on the 2013 average at $1,267/day, rates have softened in recent months to fall below $1,000/TEU. Meanwhile, the benchmark new build price for a 13,000 TEU box ship stood at $115.5m at the end of August, up 2% from the end of 2013.