Container freight spot market prices rebound

Date: Tuesday, November 12, 2019
Source: Lloyd's Loading List

In what has been a mostly disappointing year for ocean freight carriers, spot market freight rates are currently enjoying a resurgence, amid a growing number of idle ships and new bunker surcharges, according to container shipping analyst Drewry.

Drewry’s World Container Index – a composite of eight major East-West trades – in the past two weeks has “swelled by $210 to return losses accumulated over the prior two months”, the analyst noted.

Looking at what is behind this mini-recovery, Drewry said it was important to give some context to understand the true state of the market, noting that “since the mid-point of this year spot rates have been significantly down on the corresponding period in 2018. This is less a reflection on the current market and more to do with what happened last year, when the US-China trade war supercharged freight rates. Therefore, spot rates in 2H19 (the second half of 2019) were virtually destined to look very weak in comparison to an artificially inflated market.”

Drewry continued: “Today’s market is not in full bloom, but it certainly is not as bad as it initially appears. In our opinion the lower prices of 3Q19 were a consequence of a diminished trade-war multiplier and a return to the rate cutting tendencies by some carriers. The current freight revival is unlikely to have come from an unexpected demand boom. Volumes were moribund in the third quarter peak season and judging by the continued heavy use of void sailings by carriers that situation hasn’t changed dramatically.”

Instead, it is changes on the supply side that are driving the upwards momentum, Drewry highlighted, adding: “The idle fleet has skyrocketed with just over 1 million teu, or 4.5% of the total cellular fleet, out of action as of the first week of November. That represents an extra 400,000 teu added to the inactive fleet in one month, which can be attributed to more ships being sent to dry-dock for exhaust scrubbers in readiness for the new IMO 2020 low-sulphur fuel regulations.”

Pointing out that a bigger idle fleet does not automatically produce higher freight rates, Drewry noted: “The idle fleet percentage was comparably high in March, but as this coincided with a Chinese New Year-related lull in demand, it merely helped to raise the floor for prices rather than push the ceiling. This time, however, it appears that demand is sufficiently strong that similar supply-side reductions are translating into more positive utilisation and freight rates.”

Drewry said ship utilisation for the months that data is available show a marginal improvement over last year, “hence why we think carriers were engaging in rate discounting; but when the statistics do arrive, we expect to see that the fewer ships sailing in November were much fuller than of late”.

It said the fact that carriers are beginning to transition to higher new bunker surcharges related to IMO 2020 was adding to the inflationary momentum, noting that “this process is expected to ramp up for December and should contribute to a strong end to the year for carriers, running contrary to what was seen at the end of 2018”.

Drewry concluded: “The extraordinary events of the last 18 months or so – the trade war and IMO 2020 – have made direct year-on-year comparisons almost worthless, making it all the harder to accurately assess the true strength of the market by looking at freight rates alone. While carriers will welcome the upturn in prices, they will also be mindful that it is slightly illusionary as it required a substantial (and temporary) removal of tonnage and a costly new fuel regulation to achieve.

“Freight rates will continue to rise on account of higher bunker surcharges, but for carriers the true measure of success will be whether or not they rise sufficiently to cover the additional costs.”

 

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