Ocean freight's rising tide yet to ebb as operators steer capacity

Singapore

THE current bull market for spot ocean freight is likely to ease in 2021, but rates are unlikely to collapse because ship operators have mastered capacity management skills, said analysts covering the industry.

Spot rates for the various trade lanes have spiked since mid-year, driven by sharp increases in demand for consumer goods as people worked from home amid pandemic-induced lockdowns.

Andy Lane, director at CTI Consultancy, expects the price hikes for various routes to plateau as shippers find them prohibitive and seek alternatives. Also, pandemic-fuelled demand may eventually taper off as economies reopen, even though it may remain strong through the first quarter of 2021.

"We will not necessarily, however, see sharp decreases in freight rates, as the ship operators know the capacity management tactic very well now, and are rather good at it... But we should expect freight rates reducing to somewhere between where they were at the start of 2020 and where they are now, " he said.

SeaIntelligence Consulting CEO Lars Jensen wrote on the Baltic Exchange website that carriers will reduce capacity to match any decline in demand. "But rates are unlikely to collapse."

Should demand continue, he said, there is some capacity pool that could be activated.

Jefferies Hong Kong analyst Andrew Lee wrote in a report that he expects freight rates to most likely continue rising into January, driven by pre-Chinese New Year shipments. He sees the Chinese New Year holiday break providing a breather for easing.

Rates for the Asia-North America route were the first to move: prices for a 40-foot container to the east coast rose from US$2,500-US$2,700 early in the year to US$3,300 at the end of the second quarter and then to US$4,600 three months later. It was US$4,700 the first week of December, which is likely to stay flat until Chinese New Year, Mr Lane said.

The Asia-North Europe rates have been typically at US$500-US$1,000 per 20-foot container, and softened to US$750-US$850 at the end of March, as the pandemic took hold in several Western Europe economies.

But prices rebounded to US$850-US$1,000 by mid-year, and edged up to US$1,000-US$1,200 at end-September before jumping another 27 per cent in the last week of November. By early December, they had surged a further 13.5 per cent to US$2,375.

For Asia-Latin America, the rate was US$780 per 20-foot equivalent unit at the half-year mark, but it is now many times over at US$5,225.

Spot rates are a bellwether for contract rates, with many of these expiring at the end of this year, or in the case of Trans-Pacific, the end of April.

When new contracts are being negotiated, rates are expected to be higher, said Mr Lane. "We might also expect a higher percentage of demand committed on contracts, as those with a big reliance on the spot markets in 2020 will have seen prices spiral out of control over the past six months and/or will not have been able to find space to ship."

Contract rates usually run for three to 12 months, and remain constant throughout. Container freighters are obliged to make available a certain amount of space while the shippers have minimum volume commitments.

It was a very different picture when the pandemic first gripped the world early this year.

When the coronavirus started blindsiding the world, with China first to go into a lockdown to stem the spread and other economic powerhouses following suit, orders plunged for most goods.

Overnight, about 15 to 25 per cent of the demand for transportation failed to materialise.

Ship operators experienced even more losses immediately after the Great Recession in a race to the bottom as operators scrambled to fill ships, Mr Lane said.

After the Covid-19 spread slashed orders earlier this year, ship operators and their alliance partners axed sailings to cut capacity in line with the drop in volumes. The capacity management helped rein in costs for operators and also preserved freight rates.

But the capacity cuts went overboard as a result of poor demand visibility. Also, there was a sharp rebound in demand as people in lockdown diverted their spending from services to goods as well as added office equipment and home improvement products, fast depleting vendors' inventories.

Mr Lane said Beijing and Seoul were highly concerned about the high freight rates and lack of capacity by September. All the axed sailings were restored as the operators also tried other ways to raise capacity.

Though capacity has improved, other aspects of the supply chain have hit bottlenecks, with equipment and containers in shortage, and ports overwhelmed by the surge in volumes. However, the congestion in global ports means turnaround times are longer, further exacerbating capacity constraints.

For now, the freight ocean industry is no longer about figuring out which route offers strong demand. Instead, shippers are focused on how to secure an empty container to ship cargoes, HSBC global research said in a recently published report.

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