Cautious optimism on container shipping

JIT SHOULD surprise nobody that cargo, either still in containers or unloaded onto pallets, is building up in warehouses, port terminals and inland depots in Europe and North America. Most of the countries that normally import large quantities of consumer goods are in lockdown and retail demand has dropped away drastically, despite frantic efforts to boost online sales and courier deliveries where such sales have still been permitted.

International freight and logistics insurer TT Club has sounded an alarm over this accumulation. It is worried about the additional risk this is bringing operators. But full container yards and warehouses, of course, spell bad news for the container shipping lines.

As TT points out, the current pandemic has disrupted global supply chains in a wide variety of ways. In particular, the lag in its effects between the large-scale sourcing regions of China and other parts of Asia and the consuming markets of Europe and North America has caused significant build-ups of goods produced in the former regions but not now required in the latter.

Given the above it would be easy to assume it is all doom and gloom in the liner shipping business. However, the reality is more nuanced. Ocean freight rate benchmarking and market intelligence platform Xeneta comments: "As the global economy reels from the ongoing impact of the coronavirus, hard work and strategic thinking from the carrier community appears to have mitigated immediate damage to long-term contracted ocean freight rates."

Climbing rates

The Oslo-based company continues: "Despite the spectacular drop in economic activity, unprecedented rises in unemployment, and the apparent certainty of global depression, the latest XSI Public Indices report from Xeneta shows that rates actually climbed during April. The rise, although small at 0.7 per cent, reverses the decline seen in March, reinstating a trend of gradual monthly increases that began in October 2019."

Xeneta CEO Patrik Berglund explains: "As we all know, the world economy is in turmoil and, in this segment, supply clearly outstrips demand. However, carriers have been working hard to make adjustments to protect rates, aggressively withdrawing capacity from the market and adopting more 'creative' strategies."

"For example," he says, "on the Far East-Europe trade we are now seeing some owners sending ships round the Cape of Good Hope rather than utilising the Suez Canal. This obviously takes longer, temporarily removing capacity, while also saving on Suez transit rates. As such, contracted rates are generally holding strong, with spot rates, despite a bleak outlook, also proving resilient for the time being. How long that lasts is, of course, another issue."

Mr Berglund is indeed careful not to paint a too rosy a picture. As oil prices collapse to historic lows, he notes, carriers will likely come under increasing pressure to drop or amend the bunker surcharges introduced to cover fuel costs in line with IMO 2020. Furthermore, the introduction of new, record breaking tonnage to the market will only add to the glut of supply.

"Carriers are, and will be, subject to huge pressure in the immediate future," he states. "A disciplined approach will help safeguard rates, but, given the economic dire straits, will individual carriers hold ranks or be forced to reduce rates in a bid to secure business and claim market share?"

Singapore-based Pacific International Lines (PIL) has not been immune from the pressure and has now withdrawn from the transpacific trades and taken other measures in response to very tough market conditions. However, PIL has been at pains to stress it is not staring into the abyss and has issued a strong rebuttal to fake news and rumours circulating on social media. PIL is now one of the world's top 10 containership operators and is the largest shipowner in South-east Asia.

Making steady progress

It says that, as the Covid-19 situation in China continues to improve, PIL and all its China subsidiaries fully resumed operations on March 9. PIL says that it has been making steady progress and is currently actively preparing for a strong rebound after the epidemic.

The statement adds: "In the face of an increasingly complex and uncertain global market environment, PIL has remained resilient by embarking on a service rationalisation which will focus our efforts on key liner markets in Asia, the Middle East, Africa, Oceania and South America. Our strategic business integration has enabled us to be well-positioned in capturing market opportunities brought about by the Belt and Road Initiative (BRI), and, moving forward, PIL will continue to strengthen our leading position in the North-South routes."

As part of this strategy PIL has announced the enhancement of its weekly services to South Africa, with additional direct ports of call and improved schedule reliability.

Another surprising indication of longer-term optimism comes from maritime research consultancy Drewry's latest Container Equipment Forecaster report which shows that in the first quarter of this year new container prices and lease rates for all of the main categories of containers were up on the final quarter of last year and on 2019 as a whole. Drewry predicts that, even though the Covid-19 pandemic will result in a decline in the size of the container equipment fleet in 2020, newbuild prices and leasing rates are expected to firm up. A strong recovery in trading volumes in 2021 will reinforce this situation.

So there seems to be a theme of very cautious optimism among industry observers. But liner shipping will still be an industry beset with too much capacity. That problem will not go away.