Container freight rates are free-falling as the cost-of-living crisis exacerbates. The charter market has followed suit. Capacity management comes to the fore again. By Michael Hollmann[ds_preview]
The mood in container shipping is not the same anymore. Until summer, most could not imagine a return to the freight and earnings levels before the pandemic. However, a rapid deterioration in spot freight rates over the past 4–6 weeks is causing many in the industry to have second thoughts.
The speed of the correction right now is bewildering, with market indices for rates such as the Shanghai index SCFI or the World Container Index (WCI) dropping by around 10 % week after week lately. Spot rates for Far East/Europe westbound shipments are down by 25 %, those for transpacific eastbound carryings to the US West Coast even by 38 % month-on-month as shown in our market compass.
According to the WCI, spot rates across all main trades are 57 % below the peak of September 2021 now. They are still 21 % higher than the 5-year average, but this margin is getting smaller and could be completely erased before the end of this year if the speed of decline is not tempered.
What seemed unbelievable just a few months ago, is now a certainty: Ships are no longer sailing full on most trades, hence container lines will be forced to limit capacity if they want to stop rates from falling over a cliff. Two developments have been colluding lately to undermine vessel utilisation rates: improvements in port congestion and vessel round-trip times (higher productivity = more capacity), and flagging cargo volumes (less demand). Official cargo statistics up until July only show a modest decline in container trade volumes in the mid-single digits.
No comfortable situation
The talk in the industry, though, suggests that demand contraction has become more severe in the last weeks as the effects of energy shortages and inflation are playing out. Hundreds of billions of Euros are absorbed by cost increases for households and businesses in Germany alone.
It is hard to see how a recession should be avoided. Consequently, in the short run, cargo volumes are unlikely to expand again to levels needed for full employment of the world container fleet. Much less so, as the fleet is poised for quite some growth next year: analysts such as Clarksons Research are projecting +8 % growth in world container ship capacity in 2023 as the record volumes of tonnage ordered over the past two years come up for delivery. There will be no comfortable solution for container lines and shipowners after a brief spell in history in which cargo volumes surpassed fleet capacity, thus employment was guaranteed. Two options: either all the enlarged capacity will be deployed causing market rates to fall further OR some of it is pulled out through idling, slow steaming or demolition. Both options cost money, potentially vast amounts of money.
The comfort is that shipping lines and many owners can afford it. Due to sky-high freights and charter rates so far this year, 2023 will still be a record year for earnings. Spending some of it to pay ships for staying out of the trade and preserving some kind of balance makes sense because a hard landing for all in the market would be more damaging. Not only for shipping but also for trade and the economy at large. A slump in rates and a full-blown bust in the shipping industry usually entails a lot more stress, defaults and restructuring of services than well-timed capacity reductions aimed at stabilising the market. Just when shipping services are gradually starting to normalise after two years of disruptions… Imagine: war, inflation and an another round of (shipping) disruptions? What a nightmare.