Demand drivers and freight rates
Driven by the pandemic and stimulus-induced consumer spending on retail goods, container shipping has been a great place to be for carriers and tonnage providers, while proving a headache for those with cargoes needing to be moved in a timely manner.
The start of this year has been the busiest Q1 on record, with volumes reaching 42.9m twenty-foot equivalent unit (TEU), a 10.7% increase on Q1 2020 – and a 6.8% increase compared with Q1 2019 – though still a slowdown from Q4 2020 when 45.9m TEU were moved.
Despite the quarter-on-quarter slowdown, monthly volumes in March were the highest on record globally with 15.5m TEU being loaded onto ships. This breaks the previous record, set in October last year, when volumes reached 15.4m TEU. Prior to 2020, the highest volumes had ever reached were 15.0m TEU in May 2019.
BIMCO expects high volumes to continue into the upcoming peak season. However, once that has passed and we approach the post-pandemic world, demand looks set to slow as stimulus measures and restrictions are eased, leaving consumer spending patterns to find a new balance.
In today’s conditions, with equipment imbalance and port congestion compounded by the closure of the Suez Canal, the high volumes sent freight rates soaring to new peaks and left carriers struggling to keep up as they booked huge profits in the first quarter.
To meet market demands, carriers have been desperate to get hold of extra ships. However, the high demand has left the idle fleet at very low levels, leaving charterers with few options and tonnage providers with big smiles. Alphaliner estimates that on 10 May, 70 ships were idle, with an average capacity of 3,393 TEU. Add to that the ship in repair yards and the total rises to 171, with a combined capacity of 627,650 TEU, or 2.6% of global container-ship capacity.
The low number of available ships coupled with carriers’ desperation to secure tonnage, means the latter have proven willing to accept tonnage providers’ ever more onerous demands. A 700 TEU ship is now being chartered for just under USD 10,300 per day and, at the other end of the scale, an 8,500 TEU ship is fetching USD 62,000 per day. On top of higher prices, charterers are using their upper hand in negotiations to lock-in contracts with a two- or three-year duration – sometimes even longer – at today’s rates, hedging their bets against a future downturn in the market.
High charter rates have been made much easier for carriers to swallow by developments in the freight market. The freight rates carriers are currently able to charge, both on the spot and long- term contracts, are more than enough to cover the higher charter rates.
Spot freight rates, which had been flattening out and even on some trades starting to fall, have risen again on the back of the Suez Canal closure and the subsequent disruption, as well as the knock-on effects of delays and missed sailings.
The most obvious example of this is on the Far East to Europe route, where, after peaking at USD 8,920 per forty-foot equivalent unit (FEU) in mid-January, rates had begun a gradual decline. To put this in perspective, at around USD 7,300 per FEU at the end of March, spot rates remained far above the level of previous years. However, from mid-April they started climbing again, reaching USD 9,581 per FEU on 27 May.
The downturn in spot rates from the Far East to the US coasts has also been turned around, rising to USD 4,607 per FEU to the West Coast and USD 5,922 per FEU to the East Coast on 27 May, both of which are above the previous highs of earlier this year.
A leading carrier estimates that its global average cost per FEU is around USD 2,000, illustrating just how profitable today’s market conditions are.
More importantly for many carriers, long-term freight rates are being locked in at high rates and, in some cases, just as with charter rates, for longer periods than usual. Long-term Far East to Europe rates have risen by 141.0% since the start of the year and are up 175.7% when compared with the same day in 2020. Into the US West Coast and US East Coast, they have risen by respectively 106.0% and 48.1%, since the start of the year.
Carriers have clearly had the upper hand in recent negotiations, but how they are choosing to play this varies, as some prioritise pleasing their high-value customers, lowering their potential short-term gains, while others are maxing out on the current conditions. On the losing side of this power battle are the shippers. They are paying record-high freight rates and, in return, are getting a poor service, as schedule reliability drops to new lows. The long-term fall-out of the specific carrier/shipper relationship will only be fully known once market conditions ease.
Surging profits and high demand have sent the appetite for new ships soaring with 55 ships of an average capacity of 6,256 TEU being ordered between 1 April and 25 May. This comes on top of the record-high 97 ships ordered in March. CMA CGM is behind 22 of these new orders, which come in three sizes: six 15,000 TEU ships, six 13,000 TEU ships and 10 with a capacity of 5,500 TEU.
So far this year, some 229 ships totalling 2.2m TEU have been added to the order book. This compares with deliveries of 393,566 TEU, leaving the combined orderbook – of 4.35m TEU – more than twice the size it was eight months ago when it bottomed out at 1.95m TEU.
The high demand for container ships is also clear at the other end of their life-cycle with no ships sent for demolition in April, and only 10 during all of 2021. Of these, the largest was the 1,839 TEU-capacity Maersk Taasinge, built in 1994. In total, just 8,064 TEU has been demolished this year.
Over the whole year, BIMCO expects demolition to drop to its lowest level since 2007. Add to that a further 480,000 TEU set to be delivered and the fleet will end the year 3.5% bigger. With the majority of the newly ordered tonnage set for delivery in 2023, fleet growth should slow next year before coming back strongly in 2023 when we already expect delivery of 1.5m TEU.
High freight rates will continue for the next three to six months, because demand remains high and the supply chain logjams have still to be cleared. With the traditional container shipping peak season approaching, freight rates will continue to be strong, although they may not stay at current record-high levels. As we saw before the blockage of the Suez Canal, spot freight rates had slowly started to soften on major routes, though remained at historically high levels.
We can foresee one potential disruption to continued strong demand through this year’s traditional peak season. If the high volumes we are currently seeing reflect importers’ frontloading their goods, then rates could soften significantly. After having had their fingers burned many times over the past year, and with the current delays and disruptions in supply chains around the world, getting their imports in now would insure them against not having sufficient stock when they need it.
Further down the line, demand looks set to ease as pandemic-related stimulus packages start to dwindle or spending shifts away from securing consumer income and towards longer-term economic projects such as infrastructure investment. These will no doubt help the economy recover, by supporting consumer demand, but not to the same extent as has been the case with spending up to now.
The most obvious example of this is in the US where a third round of stimulus cheques arriving (USD 1,400) immediately led to record-high retail sales. In fact, in the first three months of the year, US container imports to the East Coast are up by 22.6%, and imports by the West Coast are up by 40.3% in the first four months – the driving influence behind record-high volumes globally.
However, as the focus now turns towards infrastructure and investment, US consumers will no longer have a direct cash injection with which to buy imported goods. Furthermore, as the economy opens up, the proportion of spending on services is already increasing and domestic manufacturing is picking up, all of which will contribute to an easing in demand for imported containerised goods.
The high contracting that has fuelled this market boom could lead to a repeat of the overcapacity problems the market has faced for many years once these ships are delivered. Issues of overcapacity have been forgotten in recent months but, once more normal market conditions return, carriers will again have to find the right balance between supply and demand.
Another looming threat is the high charter rates into which carriers have locked themselves, in some cases for several years. Though fine now, a future fall in the freight market would leave carriers paying for today’s high-price ship while freight income falls, hurting their bottom lines.
Even if this should happen, the profits carriers are currently enjoying, will cushion their bottom lines against a future squeeze. With long-term freight rates locked in for the many months yet, and short-term shippers more desperate to secure space on ships than negotiate a lower price, 2021 may be the Chinese Year of the Metal Ox but, in shipping terms, it is more likely to be remembered as the Year of the Metal Box.
Source: BIMCO, By Peter Sand, Chief Shipping Analyst