Archives for posts with tag: freight market

Conventionally, the container shipping market is viewed as made up of two key elements: the freight market for moving boxes from A to B, and the charter market for hiring ships. Often these markets are happily moving in sync, but that’s not always the case. How does the relationship work and how closely have these markets moved in relation to each other, both in recent times and historically?

Happy Couple?

Let’s start with recent history. Improved fundamentals in 2016, when box trade grew by 3.8% but containership capacity expanded by just 1.2%, and into 2017, have had a twin impact on the container shipping markets. Firstly they helped the box freight market bottom out. The mainlane freight rate index (see graph) increased from 24 in Mar-16 to 73 in Jan-17, and this pattern has been mirrored across many trade lanes. Secondly, the backdrop eventually helped support a slightly improved charter market, with rates moving away from the bottom of the cycle in late Q1 2017. In theory, demand from freight market end users (shippers) filters down to the vessel charter market in the end, with additional volume driving charterers (liner companies) to access additional units (from owners).

Splits And Separations

But does the power of the fundamentals always drag the two markets along together? It is not always the case; they often move apart. Before the financial crisis, the freight market appeared somewhat less volatile than today, but that did not always see the markets in sync. Despite more than 20% cargo growth in 2005-06, and the freight market holding most of its ground, the charter rate index slumped by 47% from an all-time high of 172 in Apr-05 to 91 in Dec-06, as super-cycle peak rates proved unsustainable.

The post-downturn period has seen similar instances. The box shipping markets moved into an era of ‘micro’ management of supply (slow steaming, idling and cascading) and this has impacted both freight and charter markets. In both early 2011 and 1H 2015 charter rates rose as freight rates dropped like a stone. In 2011 the freight rate index dropped by 38% to 47 whilst the charter rate index rallied, as operators deployed additional capacity to the detriment of freight rates. But soon after the opposite occurred, and freight rates increased but charter rates dropped back to bottom of the cycle levels where they remained for the next three years.


In the long-term, however, the two spheres do appear to be aligned. What simple inspection suggests, the numbers confirm. In only 33 of the months on the graph (21%) have the markets actually moved in opposite directions (excluding monthly movements of less than 1%).

Let’s Stick Together!

So, the two box markets do move independently at times but they often move in sync and when apart they tend to re-align (what econometricians might call an ‘error correction mechanism’). Perhaps this just confirms that ‘cargo is king’ and the supply side eventually adjusts. Whatever the case, box shipping’s famous couple can’t keep themselves apart for too long. Have a nice day.


In the high jump ‘the scissors’ was one of a number of techniques eventually superseded by Dick Fosbury’s ‘Flop’, which saw the American athlete win the gold medal at the 1968 Olympics in Mexico City. The container shipping market has seen a bit of ‘flop’ of its own in recent years but today a return to the ‘scissors’ appears to be providing some helpful support at last…

The Flop

It has been clear to market watchers that containership earnings have spent most of the period since the onset of the global financial crisis back in 2008 at bottom of the cycle levels. The Analysis in SIW 1,245 illustrated how cumulative earnings in the sector in that time proved a bit of a flop, and notably so in comparison to those in the tanker and bulker sectors. However, it’s fair to say that things have started to look a little bit better recently.

Jumping Back

The first building block was that the freight market appeared to bottom out in the second half of last year, with improvements in box spot rates on a range of routes backed by careful management of active capacity. In the first quarter of 2017, the mainlane freight rate index averaged 64 points, up 42% on the 2016 average. However, containership charter rates remained in the doldrums into 2017, with the timecharter rate index stuck at a historically low 39 points at the end of February, before the market picked up sharply during March taking the index to 47 (though since then market moves have been largely sideways). This change in conditions was partly supported by liner companies moving quickly to charter to meet the requirements of new alliance service structures, but how much were fundamentals also driving things?

Well, the start of some upward movement at last was to some extent in line with expectations, with demand growth expected to outpace supply expansion this year, and no doubt accelerated charterer activity helped too. However, the market received additional impetus from recent sharp shifts in supply and demand.

Doing The Scissors

The lines on the graph (see description) show y-o-y growth in box trade and containership capacity; this is where the scissors come in. In 2015, capacity growth reached 8%, and remained ahead of trade growth until Q4 2016 when the lines crossed. In 2017, with capacity declining by 0.1% in Q1, backed by historically high demolition, and trade growth, notably in Asia, pushing along nicely, a big gap between the two lines has opened up. Demand is projected to outgrow supply this year (by c.4% to c.2%), but not by quite as much as seen so far. Full year expectations may be a little more restrained, but it’s still a helpful switch.

Going For Gold

So, in the case of the recent changes in containership earnings, maybe a bit of extra heat from the charterers’ side helped, but it looks like fast-moving fundamentals have offered some support too. Perhaps it all goes to show that old methods can sometimes be as good as new ones, and right now boxship investors should be happy to forget the ‘flop’ and focus on the return of the ‘scissors’.

SIW1269:Graph of the Week