Amid fairly significant turmoil today in many of the key shipping sectors, there’s one area where extreme conditions have almost become the norm. Container freight rates across a range of trades are currently at rock bottom levels, making liner operations more challenging than ever. What have been the ingredients of this hazardous environment, and is there anything out there that could change the mix?

The Explosive Cocktail

Following the onset of the global economic downturn, many observers noted that container freight rates (the amount paid to move a box from A to B) appeared to have entered an era of increased volatility. As the graph shows, on the mainlane trades box freight rates started to fluctuate more dramatically as liner companies were forced into more active supply management to absorb huge deliveries of ‘mega’-boxship capacity. This has been particularly marked since early 2011 (‘Ingredient #1’), with at least 9 sets of peaks and troughs in the index on the graph evident since then.

Not A Good Mix

If the volatility wasn’t difficult enough for liner companies to manage, ‘Ingredient #2’ has been even tougher to stomach. Container freight rates have developed a clear propensity towards a downward trend, evident in particular in 2012-13 and most acutely and dramatically across last year. Pressure on rates has come from both cyclical and structural factors. Larger ships and the accompanying lower unit costs have backed a long-term downtrend in freight rates (with scale economy benefits seemingly passed down quickly to shippers). Meanwhile in 2015 the weakening supply-demand balance and lower bunker prices placed pressure on rates. The index on the graph fell from $1,290/TEU in Jan-15 to $385/TEU in Mar-16, illustrating the potent mix.

For liner companies (and charter owners dependent on operator requirements) this was definitely not a good mix. After a year of sliding rates on the mainlanes (and elsewhere), operators have faced up to loss-making levels. By March, according to the SCFI, the key Far East-Europe rate was averaging $224/TEU. That compares to post-2012 peak levels as high as $1,765/TEU. Enough to send anyone to the bar for a stiff drink!

A Nasty Double Shot

Of course, a particularly nasty cocktail of factors was at play last year. There were all time record deliveries of 12,000+ TEU capacity totalling 0.8m TEU. And a positive demand situation eroded pretty quickly with full year world container trade growth reaching just 2.4%.

Time To Get On The Wagon?

This all sounds familiar to critics of the liner business model, but is there any sign of the operators eschewing the cocktails and getting ‘on the wagon’? Well, ongoing major carrier consolidation could help if it brings ordering of very large ships under control. But might it just trigger another ‘round’ or two first? Otherwise it’s up to the demand side. But at least with box rates so low, it’s cheap to move a glass or two of wine around while we’re waiting. Even at $1,000/TEU it’s only 7 cents per bottle. Until things turn for the better, let’s raise a glass to the benefits of cheap container shipping!