Despite the recent increase in rates on major east-west trade lanes, the container shipping industry “remains mired in troubled waters,” according to the ocean freight rate benchmarking and market intelligence provider.
The recent increase in container freight rates on major east-west trades is no more than a flimsy disguise for the “fundamental weakness” of the ocean shipping industry, according to ocean freight rate benchmarking and market intelligence provider Xeneta.
Spot rates measured by the Shanghai Container Freight Index (SCFI) and Ningbo Containerized Freight Index rose sharply last week on the news South Korean ocean carrier Hanjin Shipping had filed for court receivership, leaving various ships stranded and some carriers refusing to tender cargo to or receive its cargo, at least temporarily.
Oslo-based Xeneta, which crowd-sources over 12 million contracted rates over 60,000 individual port pairs, said the “positive swing belies an industry still suffering from weak demand, increased void sailings and devastated profit margins.”
“The container ship sector has been in a state of flux for some time and, unfortunately for its key players, the prospect of stability remains a distant speck on the horizon,” said Xeneta CEO Patrik Berglund.
“Short term rates have been rising on the main Far East Asian to North European port route, the world’s most important trade channel, since hitting lows in March. At that point, the market average price for a 40-foot container stood at U.S.$552, now it’s climbed to U.S 1,172. On the face of it, this is a strong development for container ship companies, but the industry has been undermined by weak fundamentals for so long that it’s not quite that simple.”
Berglund noted fundamental issues plaguing the industry, most notably overcapacity, as an estimated 208 new build containerships were delivered in the last 12 months, despite an existing supply/demand imbalance. The introduction of new vessels into a market “already awash with a new breed of megaships” has lead to an 8.1 percent oversupply of capacity, according to Berglund.
“There’s simply been too much space and not enough demand,” he said. “European economies remain fragile, U.S. inventory levels are high, and Chinese imports have receded as a result. The industry is trying to respond, with mergers, acquisitions and an increased number of void sailings, but is that enough to fix the underlying problems in the near future? I’d argue that it’s not.”
He also noted the massive losses taken in the first six months of 2016 by some of the industry’s biggest players. AP Moller-Maersk, for example, saw profits fall 90 percent year-over-year in the second quarter, while several other top-20 carriers have reported losses in the hundreds of millions for the quarter and first half 2016.
“Carriers have still managed to lock in customers with long-term contracts, but at much reduced levels,” said Berglund. “The market was so tough that they’ve been forced to accept such rates – the alternative is not moving the cargo. This has damaged revenues.
“However, there is an adjustment as the market slowly trends upwards,” he added. “Our feedback from shippers shows that they’re now struggling to negotiate market average prices from suppliers. This provides a strong indication that the upwards rate trend will continue and that container ship operators don’t want to get locked in to long-term contracts at the same low levels they’ve previously offered.”
The recent news of Hanjin Shipping’s insolvency “adds yet another twist to the unpredictable container segment storyline,” he said.
“Competitors will now be battling for market share and scrambling to fill the holes created by the firm’s demise. This should allow them to crank up prices. One additional possibility is an acquisition from one of the larger market players to consolidate market share. Watch this space.”
Xeneta: Container rate rebound ‘disguises fundamental weakness’
