The short supply of containers has not touched the red line but if things don’t improve soon trade might end up coughing up higher freight rates for exports from India. Meanwhile, the impending situation has unlocked an opportunity for investors to explore manufacturing container in India. Indian market is not new to container manufacturing but unlike any other commodity the feasibility of this sector depends on the volume of cargo inflow and outflow
In the last few years share of containerized cargo in India has peaked up but in the last few months the trade is feeling the heat of container shortage in the market. While there could be several facts that resulted in the tight supply scenario but the underline largely lies with slowdown of manufacturing industry in China and its aftermath. Giving a prospect of container industry in China, the country’s major container producer Singamas Group revealed, “In 2016, total production volume and maximum annual capacity was 1.85 million teu and 5 million teu respectively. Due to the environmental issues in China, all container factories will apply waterborne paint from April 1, 2017. Some factories will suspend production for line modification to adopt the waterborne paint. The productivity of waterborne paint containers is much less than solvent based one. We expect the container supply will be reduced in 2017.”
In the year 2015, total global containerized trade volume is estimated at 1.69 billion tonnes or 175 million teus. And more than 90 per cent of the containers are manufactured and supplied from China. However, intra-Asian containerized trade has slowed down in recent time and one of the factors that came into play is deceleration of manufacturing sector in China. The gravity of the situation could be gauged from the fact that Singamas Container Holdings, a major global player in container manufacturing brought down production volume by 23 per cent in 2015.
Though the short supply has not touched the red line but if things don’t improve soon trade might end up coughing up higher freight rates for exports from India. Meanwhile, the impending situation has unlocked an opportunity for investors to explore manufacturing container in India. Indian market is not new to container manufacturing but unlike any other commodity the feasibility of this sector depends on the volume of cargo inflow and outflow.
Slackening Freight Rates
Fall in freight rates and leasing rates further pushed back demand for new containers. The impact of past decisions to bring in larger container vessels resulted in over supply of containers and bigger size vessels in 2015 was not in line with the trade demand. Though the shipping lines could have recovered by means of economies of scale but slower economic activity in China, commotion in Europe, falling commodity prices worsened the situation. As a result container freight rates declined steadily in the past two years. Even one of the most profitable routes Shanghai–the US registered a freight rate fall in double digits. Soon it led to consolidation of shipping industry.
The Green Impact
Stricter environmental regulations are becoming the norm and the container manufacturing industry in China was needed to realign and refit their factories accordingly. In this process, water-borne paint coatings are required to be applied to containers instead of regular spray colors. Meanwhile, the process requires significant investment to upgrade factory paint workshops which many of the companies are not able to do particularly at a time when new container demand is weak.
Moreover, other Asian markets are fast catching up with China in terms of labour and production cost competitiveness. Explaining the situation, Singamas said, “We expect number of container manufacturers will decrease in China as more and more factories have moved out of China to other developing countries, like Vietnam and India. Container manufacturers will closely review the situation of export to see if there is any possibilities to set up new factories in other areas. Also, some small manufacturers may close their plants as they are not willing to invest on upgrading facility to fulfill the new regulations of environmental protection in China.”
Economies of scale is the trick
Unlike other products, manufacturing of containers is economically more feasible in a market where exports are more than imports. Otherwise it will make the business unviable as the freight cost to ship an empty container from a country to other could cost equal to almost 30-40 per cent of the market price of a container. And this is one of the reasons for China becoming a hub for container manufacturing. Moreover, China also had an entire eco-system of industries which produce raw materials such as steel, floor board, locking bars, door seal, paint that are used to build a container.
Bijoy Paulose, Managing Director, VS&B Containers Group said, “To make India a significant player in container manufacturing, there is a need to boost exports. Container ports on the east coast of India have higher import volume as compared to export, hence these ports are not suitable for the purpose. However, on the west coast, Mundra is a location where exports have surpassed import hence making it a better location to
China originally became the prime manufacturer of ISO containers, firstly, because of low labor costs, later because of China becoming the steel recycling hub globally, then of course they surged as the ‘factory to the world’. India could be competitive but it must become a larger ‘steel recycler’.
manufacture containers. With the government policy emphasizing more on coastal shipping and growth in domestic consumption, container manufacturing could become a viable industry sometime in the near future. Currently the demand has not reached to a level to set up a plant in India to meet the requirement because minimum production capacity of a plant is 40,000-50,000 teus per month. But at the moment the demand for new container is much lower in India.”
On the other hand, there is a disadvantage for Mundra as it is very close to Dubai and other ports located in the Middle East which is a container surplus region. Middle East is a net importing region and trade is heavily inclined towards containerized imports whereas export from the region is POL and liquid bulk. Hence, the surplus container capacity is mostly moved to the West Coast of India.
Opportunity and Challenge for India
Steel, flooring, paints and other accessories are major components used for container making, but steel accounts for more than 50 per cent of raw material cost. Higher price of steel in India as compared to China puts prospects of container manufacturing on a distinctive disadvantage. While importing steel from China could be a viable option to compete on price front with Chinese manufacturers but steel import from China attracts antidumping duty. Furthermore, in the second half of 2015, price of corten steel used in containers declined and weak demand further pushed average selling price of 20′ dry container prices to about $1,800 which is 15 per cent lower than earlier price.
Container manufacturing industry can take a cue from China by using scrap as a raw material. Barry Naef, Executive Director, ISBU Association had lived in China for about a decade and had closely observed evolution of the industry. Naef said, “China originally became the prime manufacturer of ISO containers, firstly, because of low labor costs, later because of China becoming the steel recycling hub globally, then of course they surged as the ‘factory to the world’. India could be competitive but it must become a larger ‘steel recycler’.”
In the last 24 months, the drastic rate at which flow of new containers have come down in the global market was realized when major container producer China International Marine Containers (CIMC) in September 2016 announced that its dry container sales volume has came down to 238,300 teus in 2016, which is a fall of 67.63 per cent as compared to 2015. Sale of reefer was even worse as it has come down by 74.34 per cent. In such market scenario, it is evident that there is a short supply of container and if global trade volume picks up markets could face a supply crunch. The effects have started to be felt in India as well. A senior executive of a major multinational shipping lines, on conditions of anonymity, said, “Currently, the container supply scene is getting weak because India’s containerized imports have reduced whereas exports have started picking up. Though there is availability of 40’ containers but the shortage of 20’ containers is now being felt. Shipping lines and leasing companies are not buying new containers for the last 3-4 years, and since new orders are not being placed container manufacturing units in China have started to cut down on production. The containers available in the market are fast ageing. The peak season starts from end of March and demand for container will increase leading to further scarcity. But when imports go up in coming months the supply of container might stabilize.”
Citing reasons for shortage of containers, Bijoy Paulose, Managing Director, VS&B Containers Group said, “Till about 7-8 months ago there was a complete surplus of containers in the market, hence many of the container manufacturing factories in China had cut down on production. There were many factors which created demand for containers but one of the major factors was collapse of Hanjin shipping. After the bankruptcy of the shipping line, a large volume of containers owned or leased by the company couldn’t be brought back to the market due to regulatory and legal constrains.”
Due to the mismatch of demand and supply, prices of containers have increased significantly in India. Container price about 7-8 months ago was $1,400 whereas now the price has gone up to $2,200.
Who control the box supply?
Supply of boxes for trade routes between Middle East and India is majorly controlled by NVOCCs and remaining by shipping lines. However, shipping lines have the control over supply of boxes for trade routes from India to South East Asia, China, the US and the Europe. As compared to other major Asian markets, NVOCCs have a much larger segment and role in supply of containers in India, and it is because majority of trade routes are short haul routes – India-Middle East; India-Singapore; and India-Sri Lanka. But in major Asian markets, shipping lines control supply of containers on trade lanes like China- Japan; and China-South Korea, and in these regions NVOCCs have very little control.
Exports from India is very less as compared to imports, therefore traditionally India is a surplus location for containers. The import and export container ratio in India is 6:4. But over a period of time exports from India has started to pick up pushing demand for containers.
Demand-Supply in 2016 & 2017 In the first two quarters in CY2016 there was large surplus of containers in Asia, and freight rates had come to very low levels, however, soon the market for containers deteriorated with Hanjin bankruptcy, and the after effect triggered a number of consolidations as shipping lines feared that falling freight rates could lead to many more Hanjin like scenario. However, market conditions improved in the third and fourth quarter of CY2016 as there was some correction in freight rates. Though shortage of containers is felt for export from China but the shortage is not very acute in India. India probably has the largest inventory of idle containers in the region, and many container leasing companies and shipping lines were taking empty containers to China and far East countries since demand for export boxes was low in the region and freight rates were even lower. Trade insiders also said the cause for shortage of boxes could be because some of the operators are hoarding boxes to push prices further up.
There are chances that the shortage of containers in India is artificially created to push rise in container leasing rates. Other reason could be that companies are more interested to move boxes to regions where they get better freight rates as compared to India. Trans-Atlantic freight rates have improved in last months while there has been no increase in freight rates for exports from India or Middle East to India, or South East Asia and India. Hence, there are chances that the shortage might be artificial as companies are not interested to serve these markets for lower rate.
In the last fiscal market conditions have forced some container makers in China to make an exit, and some suffered losses. The industry in China also facing labour resource crunch at the same time.
Samir Ghosh, Director & CEO, Transafe Services said, “Companies in India import containers from China and South Korea because the cost is about 20-25 per cent lower as compared to manufacturing in India. Most of the companies which have a bulk dry container requirement import from these markets. Hence, Indian manufacturers find it difficult to compete. The industry purchase containers from Indian container manufacturer only when there is requirement for low volume, and custom-made container requirement.”
Indian container manufacturers are surviving by fulfilling the demand for customized containers. The Indian government is promoting coastal shipping which will further create demand for containers. It could be a right time to explore investing in container manufacturing in India, but for a sustainable industry India need to become export surplus country.