Falling freight rates relieve importers

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The cost of shipping containers from China to Northern Europe has fallen by two-thirds this year – but shipping giants have once again potentially picked the wrong capital purchases

The sharp rise in freight rates, which has seen the cost of shipping containers more than tenfold on major trade routes, is now unfolding with as much momentum as it began. Importers around the world will celebrate the disappearance of cost pressure, but the shipping industry is now scrambling to manage an influx of new ships just as demand is falling.

The cost of shipping a 40ft (ft) container from China to the US west coast has fallen 84% since early April to $2,470 (£2,154), according to the Freightos Baltic Index . The rate is 86% lower than the same period last year, but still 80% higher than in October 2019, before the pandemic began.

Shipping container prices for routes between China and northern Europe began their decline in January as inflation fears pricked the demand bubble earlier on this side of the Atlantic, said Freightos director of research, Judah Levine.

The price for shipping a 40ft container to Europe fell by two-thirds on an annual basis and over 12 months, to $4,861. It is, however, still about three and a half times higher than pre-pandemic levels.

“We’re definitely seeing the beginning of a big unraveling,” Levine said, saying the impact on disposable incomes of rising inflation is a factor and the shift in spending from goods to services is one. other. Moreover, while the drop in demand leads to a drop in the volume of goods shipped, the congestion problem that has plagued the world’s major ports has eased, freeing up more ships. This added capacity is putting further downward pressure on rates, even during the peak shipping season before Christmas, with September rates lower than July for the first time in five years.

In January, just under 14% of the world’s containership fleet, by capacity, was stuck outside ports, according to Emily Stausboll, market analyst at maritime data company Xeneta.

“It’s down to just over 8% now,” Stausboll said.

Before the pandemic, only about 3% of the container fleet was typically stuck in ports due to congestion, she added.

Contractual rates – those agreed with large customers typically covering 12-month periods – are also falling, although they are generally lower than spot rates. A Xeneta index tracking contract rates from China to Europe posted its biggest month-over-month decline of 8.3% in October, although it was still 64% higher than the January 2022.

The perfect sform

It’s no wonder, then, that container lines remain on track to record huge profits this year – the most profitable line in the world, Maersk (DK:MAERSK.B), forecast earnings before interest and taxes of $31 billion this year, a 57% increase from the $19.7 billion earned last year. The FactSet consensus forecast for Hapag Lloyd (DE:HLAG) is for Ebit growth of 83% this year to €17.2bn (£14.8bn).

Combined, the world’s largest container shipping lines have made more than $400 billion in Ebit since mid-2020 and are on track to earn $275 billion this year alone, the consultancy said. Drewry expedition. This figure is expected to fall back to $100 billion in 2023.

Armed with excess capital, shipping companies went on a buying spree, ordering dozens of new ships.

According to Drewry, vessels with a combined carrying capacity of 2.6 million 20-foot equivalent container units (TEUs) are expected to be delivered to customers next year, which would represent a 34% increase from a year to year.

However, with demand expected to grow by only a measly 1.9%, this will likely put extreme pressure on rates. Simon Heaney, senior director of container research at Drewry, said large container lines are likely to pull a number of levers to limit supply growth.

The easiest way would be to delay deliveries. Shipyards almost never deliver 100% of ships on time – between 2008 and 2020 they only exceeded 90% on three occasions. In June, Drewry predicted an 88% delivery rate next year, but recently lowered it to 60%.

Another is to scrap older, less fuel-efficient ships. Drewry expects around 600,000 TEUs, or around 2.5% of the existing fleet, will be scrapped – the second highest figure on record.

“After years of near-zero demolitions, we think it’s going to come back with a bang in 2023,” Heaney said.

More ships are also likely to be sent to dry dock for repair and maintenance work.

But even after taking all these measures, capacity will increase by 11% next year, according to the company’s forecast.

Stephen Gordon, Managing Director of Ship Broker Research Clarkson (CKN), does not think the net increase in supply will be overwhelming, but he agrees that it will be high – at 7.3%, supply will increase at nearly double the rate of increase of 3.7% in over the past three years, he said. It expects a record 2 million TEUs to be delivered next year, rising to 2.5 million TEUs in 2024.

“The only thing that scares me more than a shipping line with no money is a line with money,” said Alan Murphy, founder and chief executive of research and consultancy firm Sea-Intelligence.

Although the number of global container shipping companies has halved in recent years and the industry has consolidated, Murphy fears they will repeat the same mistakes.

Shipping companies have had their ups and downs, spending on new ships when times are good only to sink quickly once the market turns.

“I said publicly six months ago that shipping companies have learned their lesson [and] they are not going to destroy their own market, but they do,” he added.

Mutiny the the bounty

Some politicians have accused the lines of anti-competitive behavior in an effort to keep profits artificially inflated.

In March, US Democratic Senator Elizabeth Warren wrote to the nine major shipping companies that make up the three major global alliances – 2M, Ocean Alliance and THE Alliance – saying they had taken advantage of antitrust exemptions “to protect their pricing power. “. .

Murphy is skeptical, however – although he believes shipping companies took full advantage of post-pandemic shortages by increasing surcharges, it was not a crisis of their making, he argued. The stalling of supply chains was due at least in part to a lack of resilience in domestic infrastructure in the United States, which could not cope with fairly modest increases in demand for goods, he said.

Moreover, the current drop in prices shows that shipping lines “do not have the power, through alliances, to set market rates”.

Drewry’s Heaney thinks carriers “waited too long to stop the rot and unquestionably ceded bargaining power to bottom-up shippers” in the next round of long-term contract negotiations.

“Rates, even falling, were just too tempting to turn down,” he said. “In our view, the group thinking among carriers has been to leverage these benefits for as long as possible.”

Lower not only rates but also volumes mean importers should be more relaxed this Christmas. Halfords (HFD)which struggled to source enough bikes last year, reported “good availability across the group” with stock levels in line with expectations, he said in an update September trade.

Sandy Chadha, Managing Director of Supreme (SUP)a manufacturer and distributor of basic items such as batteries, bulbs and vaping gear, said “everything seems to be a lot smoother and easier” this year.

Last year, the company had to rush and transport goods by air and rail as the ships filled up. This year, quoted rates have fallen by around 80%, although the depreciation of the pound against the dollar means that imports are generally around 20% more expensive, he said.

One of the tools that container companies are already using is increasing “hidden” departures, or canceling a scheduled departure to ensure ships continue to leave Far East ports at full capacity. charge. This is important because lines typically need utilization rates above 90% to stay profitable, Murphy said.

However, the heightened scrutiny the industry faces after years of excessive profits means this is a tool to be used with caution.

“Any puff that carriers are holding back potential trade and damaging national economies for their own benefit will pounce on,” Heaney said.

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