HANSA 10-2022

MÄRKTE | MARKETS Action

MÄRKTE | MARKETS Action needed to avoid »hard landing« Container freight rates are free-falling as the cost-of-living crisis exacerbates. The charter market has followed suit. Capacity management comes to the fore again. By Michael Hollmann The mood in container shipping is not the same anymore. Until summer, most could not imagine a return to the freight and earnings levels before the pandemic. However, a rapid deterioration in spot freight rates over the past 4–6 weeks is causing many in the industry to have second thoughts. The speed of the correction right now is bewildering, with market indices for rates such as the Shanghai index SCFI or the World Container Index (WCI) dropping by around 10 % week after week lately. Spot rates for Far East/ Europe westbound shipments are down by 25 %, those for transpacific eastbound carryings to the US West Coast even by 38 % month-on-month as shown in our market compass. According to the WCI, spot rates across all main trades are 57 % below the peak of September 2021 now. They are still 21 % higher than the 5-year average, but this margin is getting smaller and could be completely erased before the end of this year if the speed of decline is not tempered. What seemed unbelievable just a few months ago, is now a certainty: Ships are no longer sailing full on most trades, hence container lines will be forced to limit capacity if they want to stop rates from falling over a cliff. Two developments have been colluding lately to undermine vessel utilisation rates: improvements in port congestion and vessel round-trip times (higher productivity = more capacity), and flagging cargo volumes (less demand). Official cargo statistics up until July only show a modest decline in container trade volumes in the mid-single digits. No comfortable situation The talk in the industry, though, suggests that demand contraction has become more severe in the last weeks as the effects of energy shortages and inflation are playing out. Hundreds of billions of Euros are absorbed by cost increases for households and businesses in Germany alone. It is hard to see how a recession should be avoided. Consequently, in the short run, cargo volumes are unlikely to expand again to levels needed for full employment of the world container fleet. Much less so, as the fleet is poised for quite some growth next year: analysts such as Clarksons Research are projecting +8 % growth in world container ship capacity in 2023 as the record volumes of tonnage ordered over the past two years come up for delivery. There will be no comfortable solution for container lines and shipowners after a brief spell in history in which cargo volumes surpassed fleet capacity, thus employment was guaranteed. Two options: either all the enlarged capacity will be deployed causing market rates to fall further OR some of it is pulled out through idling, slow steaming or demolition. Both options cost money, potentially vast amounts of money. The comfort is that shipping lines and many owners can afford it. Due to skyhigh freights and charter rates so far this VIEWPOINT Container trades hit by low consumer demand Container bookings from Asia to Europa have notably weakened. Unless shipping lines cut back more service capacity, freight rates will keep trending down, says Florian Braun, Head of Ocean Freight EMEA (Europe, Middle East, Africa) at freight forwarder Flexport. Still, he thinks freight levels will stabilize above historic averages. Energy shortages, inflation and flagging growth are hitting ocean freight demand. What’s the pulse of activity right now? Florian Braun: Normally we would expect volumes to rally ahead of Golden Week but this is not the case this year. Based on our own as well as external data, I would estimate that container liftings from Asia to Europe are down around –5 % year-on-year right now. This is before the actual slack season kicks in. In particular, consumer goods flows have contracted and warehouses been filling up as people have less disposable income because of inflation. Rates are slipping fast – do you expect a »hard landing« instead of gradual normalisation? Braun: No doubt, the deterioration in rates is sharper than usual for this time of year. This reflects the reduced vessel utilisation of around 70 % nominally on Asia- Europe today. It requires 80 % or more to turn this trend around. But given the poor economic outlook, it will depend on capacity adjustments by the lines to bring utilisation back up. We don’t know what Florian Braun Head of Ocean Freight EMEA, Flexport action they will take, though. We can only look 6 weeks ahead based on schedules so we know that some 20 % of weekly capacity in the Asia-Europe trade will be blanked post-Golden Week in October. What happens after that, is any- © Flexport 10 HANSA – International Maritime Journal 10 | 2022

Orders & Sales – Container Ships New Orders – A certain skepticism has spread throughout the container shipping industry. Geopolitical uncertainties and their effects on world trade and tonnage demand are causing less activity. From Germany, USC Barnkrug has ordered another two 1,300 TEU feeders, Hartmann is said to have inked 3 x 3,500 TEU. Some regional players from Asia have also ordered small newbuildings. However, there appear to be bigger plans elsewhere. For example, major lines such as CMA CGM, MSC (12 x 16,000 TEU with LNG propulsion) and Maersk (10 x 17,000 and 10 x 2,500 TEU with dual-fuel methanol propulsion). Cosco is even said to be planning orders for more than 30 ships with 580,000 TEU (dual fuel methanol. The world‘s largest tramp shipping company Seaspan cancelled 4 x 7,000 TEU. Secondhand Sales – Since the beginning of September, the second-hand market has become even more quiet. Although various ships are offered, the interest is increasingly limited, as the prospects are rather bleak, at least compared to the previous months. Demolition – Still no demo news. However, in view of the above mentioned uncetainties, brokers expect a re-start of scrapping sales. year, 2023 will still be a record year for earnings. Spending some of it to pay ships for staying out of the trade and preserving some kind of balance makes sense because a hard landing for all in the market would be more damaging. Not only for shipping but also for trade and the economy at large. A slump in rates and a full-blown bust in the shipping industry usually entails a lot more stress, defaults and restructuring of services than well-timed capacity reductions aimed at stabilising the market. Just when shipping services are gradually starting to normalise after two years of disruptions… Imagine: war, inflation and an another round of (shipping) disruptions? What a nightmare. Container ship t / c market 4000 3500 3000 2500 2000 24.03.22 Container freight market WCI Shanghai-Rotterdam WCI Shanghai-Los Angeles MÄRKTE | MARKETS COMPASS ConTex 6,027 $ /F EU 3,779 $ /FEU 22.09.22 Month on Month 2,055 -31.6 % Dry cargo / Bulk Baltic Dry Index 1,720 Time charter averages / spot: $ /d Capesize 5TC average 16,000 Panamax 5TC average (82k) 17,983 Supramax 10TC average (58k) 18,008 Handysize 7TC average (38k) 17,130 Forward / ffa front month (Oct’22): $ /d Capesize 180k 19,379 Panamax 82k 19,157 MPP - 24.7 % - 38.3 % +53.2 % +307 % +40.3 % –7.1 % +1.5 % +83.9 % +34.1 % September '22 21,608 $ body’s guess. If alliances don’t continue cutting back or blanking capacity, rates will keep drifting lower. What’s the outlook then for 2023? Braun: As it stands, container fleet growth will begin to outstrip demand growth from now, supported also by freeing up of capacity due to easing congestion. However, we don’t foresee a return to the low freight levels of former years. Rates are going to remain higher than in 2019 also because slot costs of carriers have increased as well in the meantime. An important issue for us in upcoming negotiations with container lines is integration of systems and data to improve transparency and reliability. This is high up on the agenda and absolutely key for improvements in service quality along the door-to-door transport chain. Finally a word on the port situation in North Europe which has become a hotspot of congestion this year. How do you cope with it? Are you changing routings for containers where possible? Braun: It is no secret that vessel waiting times are much higher in Hamburg than in other ports. In early September we counted 13 ships in transatlantic and Far East services waiting to berth in Hamburg versus just one or two in Bremerhaven, Rotterdam or Antwerp. Therefore we have advised clients to use services to Bremerhaven or to Rotterdam rather than to Hamburg where possible, even if it involved slightly longer trucking, rail or barge distances to import warehouses. Delays via Hamburg were just too severe. Interview Michael Hollmann September '21 14,038 $ 12,500 tdw MPP/HL »F-Type« vessel for a 6–12 months TC Tankers Baltic Dirty Tanker Index Baltic Clean Tanker Index Shortsea / Coaster Norbroker 3,500 dwt earnings est. € HC Shortsea Index TMI – Toepfer's Multipurpose Index BMTI/EUSSIX Inter-Black Sea ($/t) Bunkers VLSFO 0.5 Rotterdam $ /t MGO Rotterdam $ /t Forward / Swap price Q4/22 VLSFO 0.5 Rotterdam $ /t 1,501 1,243 4,200 30.73 32.67 644 971 580 –3.1 % –3.6 % +5.0 % - 7.3 % - 13.5 % Norbroker: spot t/c equivalent assessment basis round voyage North Sea/Baltic; HC Shipping & Chartering index tracking spot freights on 5 intra-European routes; BMTI/EUSSIX: 3,000 t Odessa to Sea of Marmara –9.3 % –6.3 % –4.5 % Data per 22.09.2022, month-on-month HANSA – International Maritime Journal 10 | 2022 11