Capacity tightness worsened during the past weeks, propelling freight and charter rates higher. There is simply not enough tonnage to cope with the temporary burst in transport demand.
Container shipping has been outstripping the wildest expectations. There was no summer lull in trading this year – instead the industry[ds_preview] emerged stronger yet from the »holiday season«. After continued gains throughout July and August, it could not be taken for granted that the rally in freight rates and in charter rates would simply continue. However, by the middle of September spot cargo rates were up another 18% month-on-month, according to the Shanghai Containerized Freight Index which tracks price levels on 13 routes out of the Far East. Spot rates for shipments from Asia to North America have climbed to new record heights week after week.
Cash cow transpacific
Although the air seems to get thinner, they do keep nudging up baffling analysts and also putting cartel watchdogs both in China and in the US on alert. At the time of writing, spot rates for loadings ex Shanghai to the US West Coast are knocking on 4,000$/FEU – almost three times as much as 12 months earlier. The transpacific – a difficult battle ground for container lines over the past years – has suddenly become a cash cow, delivering returns unseen in other trades today. If liner operators have managed to extend their earnings spree into Q3, transpacific revenues will have a played a key role, no doubt.
Reports say that China’s ministry of transport has meanwhile intervened, summoning carrier representatives on 11 September to urge them to soften their grip on capacity and reconsider further planned freight increases. The US Federal Maritime Commission also increased its scrutiny, warning that it would seek an injunction from the federal court to prevent capacity reductions if there were indications that the carriers’ behaviour might violate competition standards as set out in the US Shipping Act. Carrier seem to have heeded the warning, with Cosco apparently cancelling a planned general rate increase while others went to reinstate sailings for October which were to be blanked, citing exceptionally high cargo demand as reason. So far, these moves have had little tangible impact on the container spot market.
Do regulators have a point to become active? Are the container lines in breach of competition standards? The fact is that the market landscape in liner shipping has not fundamentally changed since the regrouping of liner operators into just three major alliances and the latest wave of M&A some years ago – all reviewed and approved by regulatory authorities. Providing evidence of collusion among alliance members or even across alliances will also be difficult since there is proof that the consortia have taken no uniform approach to capacity management. Some blanked more sailings, others blanked less thus grabbing some more market share.
Perhaps most importantly, carriers can argue that it’s not capacity reductions but rather a surge in cargo demand that drives rates up on the transpacific today. Hard to believe but true: Despite a global recession, shipping volumes from Asia to North America have not just recovered, they are even outstripping levels during the same time last year, with CTS data showing an +11% year-on-year increase in transpacific headhaul volumes during July. Near-term container import forecasts by the US National Retail Federation remain strong.
Container lines were right to prune back capacity in the second quarter when lockdowns across the globe, particularly those in Europe and North America, caused double-digit falls in container loadings. Since then they have slackened the reins to such an extent that active route capacity got restored back to normal in the Asia-Europe trade. On the Asia-US West Coast route weekly slot capacity is currently up by more than 10% year-on-year, according to Danish research firm Sea-Intelligence. Numerous extra loaders – mainly panamaxes and post-panamaxes – have been deployed by the lines to cope with the cargo rush. It is hardly justified then to accuse liner operators of artificially limiting capacity.
On a global scale, the idle fleet continued to contract sharply, reaching 644,000TEU or 2.7% of the world container ship fleet in mid-September, according to Alphaliner. This is about the same level as one year ago. However, the lion’s share of tonnage counted as idle in fact cannot be mobilized at short notice. Most units are in dry-dock or at yard berths for scrubber retrofits or they are excluded from trading due to financial distress, sanctions or the like. There are precious few unemployed ships that carriers can draw on after they chartered in vessels »left, right and centre« in recent months, as one broker quipped. The continued rise in charter rates speaks volumes in this respect. By the middle of September, the New ConTex was up almost 16% month-on-month, with all vessel classes from 1,700TEU upwards enjoying double-digit gains.
Inventory replenishment
The current strength in container traffic – at least in the Far East/North America, Far East/Europe and the Intra-Asia trade – is likely driven by inventory replenishment across the industry and retail sectors. Merchandise stocks were radically reduced during the lockdowns, now they have to be filled up again just as fast to get back to reasonable base levels for businesses to operate. Of course, this cannot go on forever.
The big question is when this catching-up effect will begin to fizzle out. Golden Week in China at the start of October usually marks the end of the cargo peak season in container shipping. Most goods for the Xmas shopping season got dispatched by the time factories across China close down for the festive week. Will it be different this time? While some analysts are warning that the container market will inevitably cool down in October, others are suggesting that there is enough procurement volume in the pipeline for the boom to continue possibly until Xmas. If the latter proves right, the fourth quarter might turn out to be the best in a decade both for liner shipping companies and their charter tonnage providers.
Michael Hollmann
