Archives for posts with tag: freight rates

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.

Re-Coupling…

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.

SIW1277

In the shipping world, ‘Santa’s Sleigh’ is the big containership fleet, which carries the goods from manufacturers in Asia to the retailers in Europe and North America in good time for consumers to prepare for the holiday season. How full the ‘sleigh’ appears to be each year gives an interesting indication of the health of the containerised freight sector.

A Tricky Sleigh Ride

Broadly, the containership sector has generated a huge potential surplus of capacity since the global financial crisis. By the end of 2016, despite the recent surge in demolition activity, 9.1 million TEU of capacity will have been added to the fleet since the end of 2008, equal to growth of 84%. During the same period box trade has grown by around 34%. For those who deliver the world’s consumer goods, this has required a huge balancing act, managing surplus supply through slower speeds, and idling of capacity. The difficulty of this has created huge volatility in freight rate levels. Meanwhile, from early 2014 freight rates seemed to have been moving sharply downhill. Goods for the holiday season are usually moved to retailers with plenty of time to spare in the peak shipping season from May to October, but nonetheless overall movements in mainlane trade and capacity deployed (see graph description) give us a good idea of how full ‘Santa’s Sleigh’ might have been.

Last Christmas

Following the acute drop in freight rates in 2014, things were looking tricky for the bearers of gifts by the end of 2015. Spurred by ‘mega-ship’ deliveries and 8% growth in the boxship fleet, mainlane running capacity grew by 5% in 2015. But trade had hit the buffers. Although there was annual peak leg volume growth of 6% on the Transpacific, peak leg Far East-Europe volumes slumped by 3% on the back of a sluggish Europe, collapsing Russian volumes and destocking by retailers (perhaps not enough folk had been well-behaved enough for Santa to pay a visit?). At one point Far East-Europe spot freight rates hit $205/TEU, catastrophically low levels for the liner companies.

Wonderful Christmastime?

But things have eventually started to look a tiny bit brighter. Disciplined capacity management (cascading and idling) allied to slower deliveries has seen mainlane capacity drop 3% this year, whilst peak leg mainlane volumes look set to be up 2% with Far East-Europe growth back in positive territory. With the collapse of Hanjin, there’s one less sleigh driver, potentially allowing others to fill up more. Mainlane freight looks like it might have bottomed out; Asia-USWC spot rates jumped from an average of $1,459/FEU in Q3 2016 to $1,732/FEU in Q4 to date.

The Best Kind Of Present

How do things look for ‘Santa’s Sleigh’ in 2017? Well, with more capacity to come, any gains will be very hard won (and for the charter owners there’s still plenty of capacity idle). But it looks like there should be further cargo growth, so the challenge for Santa will once again be to maintain an appropriate amount of space for all the gifts. If he does that, the sleigh might feel fuller next year. That would be a nice present for the liner industry.

SIW1088

For the golfers contesting this week’s Ryder Cup, the impact of bunkers can be minimised through skill, practice and a little luck. For shipowners, bunkers are unavoidable, and over the past few years high oil prices have ensured that they have been a major handicap. Shipowners are getting plenty of practice at dealing with high oil and bunker prices, maybe they are due a change in their “luck”?

When an onlooker suggested he may have been lucky holing three bunker shots in a row, golf legend Gary Player famously replied “the more I practice, the luckier I get”. Well, over the past few years a combination of low rates and high fuel costs have given shipowners plenty of “bunker practice”.

Par For The Course

The Graph of the Week tracks the share of freight revenue accounted for by bunker costs. In the early part of the period shown, the low and relatively stable oil price ensured that bunkers did not become too much of a burden, with peaks and troughs corresponding to the strength of the freight markets. Then in 2007-08 oil prices started to rise steeply, but the strength of the freight market helped to cover the impact of rising bunker costs and ensure that the share of bunker costs remained below 50%.

In The Rough

However, in the wake of the global financial crisis, a combination of high oil prices and weaker markets caused the share of freight revenues accounted for by bunker costs to climb to much higher levels. This peaked in late 2012 and early 2013, when bunker costs exceeded 80% of freight revenue on the example tanker voyage, with the extra costs of low sulphur fuels generating even higher shares on some routes.

Driving Down Costs

Well-practiced shipowners responded by finding ways to reduce fuel consumption: slow-steaming, retro-fitting fuel-saving equipment and ordering “eco-designs”. They have found environmental regulations pulling in the same direction, and in a way helping. After all, the risk of ordering a slower but more efficient ship is greatly reduced if everyone has to do so to meet regulatory targets.

Out Of The Woods?

Further help has come from the 15% fall in oil prices since June resulting in a reduction in bunker costs (Rotterdam 380cst currently stands at $540/t, down from $601/t in June). Oil prices are on track for their third straight monthly fall, with a combination of sluggish demand and ample supplies seeing the benchmark Brent crude spot price drop below $96/bbl this week, the lowest level for two years.

Bunkers’ share of freight remains volatile and dependent on market fluctuations. Recently the percentage has started to fluctuate in a slightly lower range than previously as lower bunker prices have helped to reduce the fuel cost burden. However, bunkers’ share of revenue is still uncomfortably high for many, and shipowners have had to learn to deal with high bunker costs. For those currently in a position to benefit from lower prices today, is it luck, or is it practice?

SIW1140

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.