Chinese New Year shipments lift freight rates but margin squeeze remains

15 January 2018, Global – Container shipping freight rates in the spot market have risen 3% in the past week, mainly driven by a pick-up in shipping volume ahead of the Chinese New Year holidays in mid-February. We forecast the global container shipping demand growth to be more robust this year, rising 4.7% in 2018. However, the accelerating capacity growth of 5.9% in 2018 will put pressure on freight rates and profit margins given the higher bunker fuel costs. The world’s 6th largest liner Evergreen Marine (2603:TT)’s plans to order eight 11,000 TEU newbuild vessels and charter another twelve 11,000 TEU vessels. This could spur its competitors to follow suit, exacerbating the industry’s oversupply challenges.

SPOT FREIGHT RATES STRENGTHENED IN THE PAST WEEK

The spot freight rate index rose 3% w/w during the week ending 12th January 2018. On the major trade lanes, Transpacific spot market freight rates rose 8% and 3% w/w on the US East Coast and US West Coast respectively. Asia-Europe spot freight rates rose 1% w/w, mainly driven by rush order shipments prior to the Chinese New Year holidays in mid-February.

FREIGHT RATES ON AUSTRALIA/NEW ZEALAND, SOUTH EAST ASIA & SOUTH AFRICA TRADE LANES SURGED

Notably, spot freight rates from Asia to Australia/New Zealand, South East Asia and South Africa surged 15%, 6% and 5% w/w respectively and are 68%, 47% and 25% above last year’s levels.

Chart: Container shipping current spot freight rates (12 Jan 2018)

Chart: Container shipping current spot freight rates (12 Jan 2018)

2018 CONTAINER SHIPPING OUTLOOK: GLOBAL CONTAINER SHIPPING DEMAND GROWTH OUTLOOK IS STRONG 

We expect the global container shipping demand growth to be more robust in 2018, supported by the leading economic indicators including the Global PMI and China’s Export Orders.

Chart: Global PMI and China Export Orders (2015 to 2018)

Chart: Global PMI and China Export Orders (2015 to 2018)

2018 CONTAINER SHIPPING OUTLOOK: OVERSUPPLY IS KEY DOWNSIDE RISK 

The global container shipping fleet capacity grew 3.7% to 20.8m TEUs in 2017, below the 4.7% rise in global container shipping trade demand.

Based on the existing orders, newbuild vessels are expected to add 1.7m TEUs to the global container shipping capacity this year. We forecast the global container shipping net capacity to grow 5.9% y/y in 2018. Therefore, although we forecast global container shipping demand to be more robust, growing at 4.7% this year, demand will still fall below the industry’s capacity expansion.

More containerships will need to be scrapped and more newbuild deliveries deferred in order to increase the liners’ pricing power.

In order to keep the global container shipping industry’s demand and supply growth balanced, at least one of the three bullish scenarios below needs to happen:

  • Global trade demand growth accelerates to 6.0% or higher
  • Vessel scrapping removes more than 3% of the global container shipping fleet capacity
  • Some of the newbuild vessel deliveries are deferred to 2019

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

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

2018 CONTAINER SHIPPING OUTLOOK: HIGHER BUNKER FUEL PRICES TO SQUEEZE PROFIT MARGINS UNLESS FREIGHT RATES RISE MORE SIGNIFICANTLY

Given that bunker fuel prices have risen 13% y/y, profit margins will be squeezed this year unless the industry keeps a tight rein on capacity growth, allowing the freight rates to rise more significantly.

Chart: Spot market bunker fuel prices (2017 to 2018)

Chart: Spot market bunker fuel prices (2017 to 2018)

EVERGREEN MARINE’S PLANS TO ORDER EIGHT 11,000 TEU NEWBUILD VESSELS COULD SPUR COMPETITORS TO FOLLOW SUIT AND EXACERBATE THE INDUSTRY’S OVERSUPPLY CHALLENGES

The world’s 6th largest liner Evergreen Marine (2603:TT) announced its plans to order eight 11,000 TEU newbuild vessels and charter another twelve 11,000 TEU vessels. This could spur its competitors to order more newbuild vessels, exacerbating the industry’s overcapacity challenges.

SPOT FREIGHT RATES ARE STILL 15% BELOW LAST YEAR’S LEVELS

Notwithstanding the recent pick-up in freight rates in the spot market, spot freight rates on the Transpacific and Asia-Europe trade lanes are still 28% and 19% lower y/y during the week ending 12th January 2018.

Chart: Container shipping spot market freight rate index (2014 to 2018)

Chart: Container shipping spot market freight rate index (2014 to 2018)

 

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