Although demand growth on most of the main headhaul east/west trades continues to be strong, the growth of the cellular fleet in the next 12 months will ensure that the industry continues in its down cycle. Its impact is not expected to be as far reaching as in 2001.

World container traffic growth slowed slightly to an estimated 10.3% (year-on-year) in Q2 2005, while global port handling (including empties and transhipment) grew by 10.6%.

Demand continues to fall behind supply. The cellular containership fleet increased by 15.4% in the 12 months to mid-2006, while total effective fleet capacity was up by an estimated 13.3%. In Q2 2006, Drewry?s unique Global Supply Demand Index reached 104.1 as a result of strong seasonal demand, in some of the main east/west trades, but this is expected to fall to 102.0 for the full year.

Carrier unit revenues have fallen in both of the first two quarters of 2006 and vessel time charter rates have followed a similar pattern before stabilising a little in Q2. For Q3 and Q4, indications are that there will be further declines.

Higher bunker and vessel hire costs have impacted on ocean carrier profitability. Market sentiment has also played a bigger part this year causing average industry-wide freight rate levels to fall by an expected 6.3% by the end of 2006.

Looking ahead, supply is expected to overshoot demand despite strong performances in some headhaul east/west trades this year. However, the impact of additional capacity is not expected to be as much as was feared last year, causing a projected 1.0 point fall in Drewry?s East/West headhaul Supply Demand Index for 2006 and a further 0.8 point slide in the index for 2007. The deployment of new super post-Panamax vessels in the arterial trades will lead to continued cascading into secondary routes.

The completion of recent M&A activity has sent shivers through the industry causing a large correction in service structures, carrier market shares and has impacted on freight rate levels.

Despite the continuation of positive trends such as strong Chinese economic growth and a lack of port congestion in 2006, negative factors, including the delivery of new tonnage will mean a continuing market downturn. Ocean carriers will need to rein in their costs to fully survive the down cycle. Creative strategies such as slowing down ships to save on bunker costs may become more prominent.

Taken from the Drewry report, ‘Drewry Annual Container Market Review and Forecast 2006/07

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