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Friday
Jul012011

Container shipping market outlook: more volatility ahead

Philip Damas, Director, Drewry Supply Chain Advisors


Buyers of container sea freight services should get used to more volatility in freight rates and in carrier service performance for quite for some time, judging from market signals and from Drewry's research on future supply and demand.

In 2009 and 2010, the market swung from record over-supply to unprecedented under-capacity (and vessel layups) over a short period of time. Freight rates fell by about 30% in 2009, only to rebound by about 50% in 2010 on some routes, as shippers were left short of ship capacity and boxes.

Carriers also started introducing "slow-steaming" into their container services in late 2008, a practice which has since spread to many trade routes and many container services. The consensus view is that slow-steaming is here to stay, which means the prospect of longer transit times, slower times to market and higher levels of inventory-in-transit for shippers.

In 2011, ship capacity is more than sufficient to meet expected traffic volumes. "All-inclusive" freight rates are approximately down by 10% (depending on the routes), despite higher fuel surcharges. The net revenue from freight rates excluding fuel surcharges has declined even more than 10%, causing a return to operating losses for most carriers.

How serious is the situation of the container shipping market this year?

On the demand side, the situation is not serious and cannot be compared to the crisis of 2009. Global container traffic bounced back in 2010 and will continue to increase by 8% to 9% in the next few years (fig.1). Figure 2Although the peak season in the summer/autumn of 2011 is expected to be moderate, demand is there, as European exporters and importers know. Purchasing managers' indices in the US, China and globally are still positive, at over 50 (fig.2).

The problem and the areas of stress now are related to supply and carrier competition, not to insufficient demand.

The supply picture in 2011 also differs from what it was in 2009 and 2010. Drewry believes that one key difference this year is that carriers have abandoned their earlier policy of "capacity discipline" and lay-ups; instead, they are again focused on pricing for market share to fill all of their vessel capacities. We have seen no return to ship lay-ups, so far, and Drewry does not expect this to happen until after the peak season. In early June, the CKYH alliance (Cosco, K Line, Yang Ming and Hanjin) announced that it would pull its NE5 weekly service from the over-tonnaged Asia-North Europe route. But the other carriers have been adding capacity, resulting in a net year-on-year rise in capacity of about 25% on this route. Asia-North Europe freight rates have unavoidably declined. On this route, carriers postponed a planned June general rate increase and will struggle to get much of an increase in July, when they are due to try pushing prices up again.

Buyers of container sea freight services should remember:

Economic cycles and seasonality affect prices as well as liner industry inability to match long term supply with short term demand.

Serious procurement strategies are essential to minimise the already high impact on landed cost unpredictability – even for SMEs.

Big changes are going on in shipping with sizes of ships, reduced service levels, UK port calling and patchy reliability.

However, the supply-demand fundamentals are fairly well balanced this year on the trade routes other than the big-ship east-west tradelanes and for the global container shipping market as a whole: both effective global supply and effective global demand are expected to increase by 8-9% in 2011.

One potential concern for shippers later this year or next year is the risk of sudden withdrawal of capacity by one or more carriers, as we saw recently with the NE5 Asia-Europe service and with several discontinued transpacific niche services.

Schedule reliability is also declining and may deteriorate further if carriers try to cut corners or cancel sailings.

Moreover, the finances of several ocean carriers are looking weak. Drewry's latest "Z-score" index (a financial stress index) is in the red for 12 carriers and freight service providers and green for only 5 carriers and freight service providers. Drewry recommends that it is important to diversify and vet your carriers to minimise service interruption risk.

Another concern, well-known to all logisticians nowadays, is the rising price of fuel. This needs to be managed or hedged in contracts or via the financial market. One potential new tool is the container freight rate swaps, particularly following the introduction of the new World Container Index as an independent, external index.

Last but not least, Drewry expects that rates at least on the east-west routes will go back up again in 2012 – it would be unwise to promise to your CFO that sea freight costs will remain low forever!

To sum up, Drewry believes that the current outlook is as follows:

  • Cost volatility remains a big issue
  • Container traffic has recovered and is growing; production indices are positive
  • Capacity of ships due to be delivered this year is large and is mainly for the east-west and Asian trades (ships of more than 7,000teu)
  • Slow-steaming will continue
  • Fuel surcharges already at $700 on Asia-Europe route and will rise further
  • Fewer issues with capacity and container equipment shortages
  • Many complex drivers of freight rates plus cyclical effects – need to minimise high impact on landed cost unpredictability

Philip Damas is Director of Drewry Supply Chain Advisors. He can be contacted at supplychains@drewry.co.uk