China-US spot container shipping rates rise over 20% but can they last?

6 August 2018, Global – Spot freight rates between China and the United States have risen by over 20% in the past 2 weeks, driven by the peak season, some frontloading of cargo shipments in anticipation of further tariff hikes and freight rate increases and the carriers’ capacity rationalization. Container shipping companies that are most leveraged to the Transpacific trade lane are Zim, Ocean Network Express (comprising of NYK, MOL and K-Line) and COSCO SHIPPING-OOIL; they will be the key beneficiaries if this Transpacific freight rate improvement can be sustained.

Spot freight rates increase by over US$450/FEU on the China-US trade lane

Container shipping spot freight rates have risen by over US$450/FEU or 28% and 17% on the China-US West Coast and China-US East Coast trade lanes respectively in the past 2 weeks. Spot freight rates are now 25% and 16% higher than last year’s levels.

This ranks well ahead of the spot freight rates in the other major trade lanes which have generally risen only marginally in the past two weeks.

Chart: China-US container shipping spot market freight rates (2014 to 2018)

China-US container shipping spot market freight rates (2014 to 2018)

Chart: Spot freight rate growth (decline) in the past 2 weeks (3 Aug 2018)

Spot freight rate growth (decline) in the past 2 weeks (3 Aug 2018)

Chart: Spot freight rate growth (decline) y/y (3 Aug 2018)

Spot freight rate growth (decline) y/y (3 Aug 2018)

What’s driving this?

Notwithstanding the China-US trade tensions, the broader Transpacific container shipping demand is holding up so far. Asia-US container shipping volume has grown 6% y/y in 1H18.

We believe the risk of escalating trade tensions and potential for additional tariffs have driven importers to restock more ahead of further tariff hikes. In addition, the carriers have announced significant freight rate hikes with effect from September 2018 so some customers are shipping more ahead of these planned freight rate increases.

More importantly, most carriers incurred financial losses during 1H18 due to the depressed freight rates and higher bunker fuel costs. This has led the major carriers to increase their focus on improving profitability, driving them to rationalize their capacity and some services have been cancelled on the Transpacific trade lane. This has helped to lift load factors to mid-to-high 90% levels, boosting the carriers’ pricing power.

Is this sustainable?

We are now past the peak of newbuild containership deliveries for this year. Newbuild vessel deliveries are expected to drop 10% y/y in 3Q18 after surging 50% y/y in 1H18 which put significant pressure on freight rates during 1H18.

Overall, we forecast global container shipping demand to grow 4.2% in 2018, moderating from 5.2% demand growth in 2017. This will fall short of the container shipping industry’s capacity expansion this year. We forecast global container shipping net capacity to grow 5.1% y/y in 2018 after taking into account vessel scrapping and delivery slippage.

We expect the global container shipping sector’s operating outlook to improve from 2019 as capacity growth moderates based on the current vessel orderbook and delivery schedules.

Therefore, the sustainability of the recent freight rate hikes will depend on how tightly the global container shipping industry manages the operating capacity given that the global fleet growth outpaces demand growth this year. The key risk is that once freight rates become lucrative again, the carriers will be tempted to increase capacity and the recovery in freight rates will be short-lived.

Chart: Global container shipping demand & supply and idle fleet ratio versus freight rate growth (2007 to 2020)

Global container shipping demand & supply and idle fleet ratio versus freight rate growth (2007 to 2020)

Which carriers are the key beneficiaries?

If the spot freight rates can be sustained, it will help to improve the carriers’ earnings in 2H18 as their annual contract rates were largely locked in at low levels back in May.

Container shipping companies that are most exposed to the Transpacific trade lane are Zim, Ocean Network Express (comprising of Nippon Yusen Kaisha, Mitsui OSK and K-Line) and COSCO SHIPPING-Orient Overseas; they will be the key beneficiaries of any sustained Transpacific freight rate increase.

 

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Independent Research Declaration: Crucial Perspective does not own any position in the equities featured in this report nor have we received any compensation for writing this report. 

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