Archives for posts with tag: freight index

SIW1112Liner shipping companies are responsible for operating the world’s 5,087-strong containership fleet. They own 52% of the capacity and charter in the rest from independent owners. In principle they then turn a profit on this by transporting containers around the world for cargo shippers.

Up And Down

Recent experience suggests that this can be a difficult business. Freight rates have become very volatile, creating unpredictable earnings. The graph shows a monthly weighted average index of spot freight rates on the peak legs of the two largest mainlane trades, the Far East-Europe and the Transpacific. Long-term historical data is hard to come by but it is possible to estimate an index based on the data available at the time, including CCFI and SCFI indices. Last year the two trades accounted for 28m TEU of cargo, 17% of global box trade and a large slice of income for many major liner companies, for whom volumes carried on both a contract and spot basis are impacted by the rate environment in general.

Shipping in general is a cyclical business, but what is striking is the change in spot rate volatility pre and post credit crunch. The period between 1995 and 2007 saw two big dips and two clear peaks. In the much shorter period since the crash there has been huge volatility and already two clear peaks and three market troughs. That’s more cycles in the the last six years than in the previous twelve, not to mention the fact that the monthly index has moved within a band of $1,148 compared to $593 before 2008.

It Went Crunch

Pre-downturn freight seemed to follow longer cycles. Running capacity was linked to the size of the fleet and when demand was healthy (e.g. when Chinese exports boomed) liners benefitted and when it was weaker (e.g. the end of the dotcom bubble) or they had delivered too much capacity, then lower rates ensued.

Getting Very Bumpy

But in 2009 box trade declined by 9% whilst boxship fleet capacity grew by 6%, creating an almighty surplus and an imperative for lines to manage capacity to support rates, with sitting things through no longer an option. Initially idling slow steaming and redeployment of surplus capacity pushed rates back up, but by 2011 reactivated ca-pacity pushed rates way back down again. Since then volatility has reigned supreme and attempts to rein in capacity have been fighting a tide of supply pushing rates down, all the time with fuel costs at elevated levels. In 2012-13 the index peaked at $1,576, $1,341 and $1,257 before trending back down each time.

So container freight has become spiky, and liner companies could do without the volatility. Whilst overcapacity remains (4% of the boxship fleet is still idle), maybe the message is to ignore the ups and downs and get on with business. Those who have focused on operating vessels efficiently and cutting costs look to be doing the best. If you’re stuck on the roller-coaster, hold on tight and keep your eyes open. Have a nice day.

SIW1075Back in the 1980s, one of the first major UK credit cards used the slogan “Your Flexible Friend” to attract customers. In today’s difficult shipping markets flexibility certainly comes in handy, particularly in the containership sector.

Flexible Help

Boxship contracting in recent years has been dominated by very large ships. 73% of capacity contracted since start 2009 has been for units 8,000 TEU or larger. As these have been delivered, the flexibility of other ships in the fleet has enabled capacity growth to reach the areas where it has been needed most. Typically, new very large ships have replaced older (generally slightly smaller) ships on the mainlanes (Far East-Europe, Transpacific) which have been redeployed to the expanding north-south trades (or in some cases laid up). In turn medium sized units replaced by newly redeployed, larger units have been moved to the fast growing intra-regional trades (or laid up).

Flexible and Friendly?

At times, this has protected main-lane freight rates from the full impact of the surplus. But it hasn’t been a ‘flexible friend’ for everyone. Owners of small and medium sized tonnage (typically charter owners who account for 58% of capacity below 5,000 TEU), hoping they would be protected from the influx of new megaships, have still felt the sharp end of the surplus as capacity has ‘cascaded’ down onto their patch.

The graph shows this process since the start of 2007. ‘Cascade A’ shows the number of 3-8,000 TEU ships redeployed (or laid up) from the mainlane trades and ‘Cascade B’ shows the number of 1-3,000 TEU ships moved off of the north-south trades. This doesn’t perfectly capture everything (e.g. de-ployment of newbuilds) but it shows the ‘cascading’ pattern well.

In an immediate response to the economic downturn, 2H 08 to 2H 09 saw 280 ships cascaded and 2011 saw a total of 176. Mainlane freight rates (thick line) benefited from this but when cascading has slowed or turned negative (including reactivation of idle ships), such as in 2010, rates have eventually declined. In 2012 the rate of cascade slowed again with a net 84 units redeployed, and this led freight rates to decline significantly, and surplus has built up on the mainlanes. For operators it looks like time for another bout of serious cascading.

Watch That Limit!

But spare a thought for charter owners. After the first acceleration, cascading slowed and their earn-ings saw some upside but second time around, still shackled by 5% of capacity idle, charter rates (dot-ted line) remain in the doldrums, and it looks like another round of cascading may well come.

However, charter owners need not despair at the prospect of endless rounds of cascading. The amount of ‘redeployable’ capacity isn’t infinite, and at some point the small and medium size ranges, where growth is limited, will probably feel some benefit. As credit card users know, even your flexible friend has a limit!