East-West container shipping rates fall due to rising supply & China factory closures

11 September 2017, Global – The back-to-school peak shipping season has failed to lift spot market freight rates so far notwithstanding the carriers’ rate hike attempts. Spot market freight rates on the long-haul Asia-Europe and Transpacific trade lanes have weakened more significantly in the past week. In comparison, the Intra-Asia Pacific spot freight rates managed to hold up w/w and are still significantly higher y/y. This could drive investors to switch to carriers with larger Intra-Asia exposure and avoid carriers with substantial Asia-Europe/North America exposure.

  • Listed Asian carriers with the largest capacity exposure to the Intra-Asia and Oceania related trade lanes are SITC (100%, 2.5x P/B) and Wan Hai (47%, 1.1x P/B).
  • Listed Asian liners with the largest capacity exposure to the Asia-Europe trade are Yang Ming (39% of total capacity, 1.3x P/B) and Nippon Yusen Kaisha (34%, 0.7x P/B) and Evergreen Marine (32%, 1.3x P/B).
  • Listed Asian carriers with the largest capacity exposure to the Transpacific trade are K-Line (54% of total capacity, 1.2x P/B), Mitsui OSK (48%, 0.7x P/B) and Hyundai Merchant Marine (34%, 2.0x P/B).

WEAKER SPOT MARKET CONTAINER SHIPPING RATES ON EAST-WEST TRADE LANES

Spot market freight rates fell 8% w/w to US$812/TEU and 14% y/y on the Asia-Europe trade lane during the week ending 8th September 2017.

On the Transpacific trade, spot market freight rates also slipped 1% and 2% w/w to US$1,473/FEU and US$2,231/FEU on the Asia-US West Coast and Asia-US East Coast trade lanes and were 16% and 9% lower y/y.

PACE OF VESSEL DELIVERIES HAS PICKED UP IN 2H 2017

In July and August 2017, 0.10m TEUs were delivered per month in the global container shipping sector. This is 13% higher than the average monthly capacity added in 1H 2017 and 72% higher y/y.

Another 0.13m TEUs of capacity is expected to be delivered every month for the rest of this year which could limit the effectiveness of the carriers’ freight rate hikes near term.

Chart: Global containership capacity delivered (2014 to 2017)

Chart: Global containership capacity delivered (2014 to 2017)

FEWER CONTAINERSHIPS ARE BEING SCRAPPED

Only 18 containerships amounting to 42K TEUs have been scrapped in July and August this year. This is 56% lower compared to the same period last year and 55% below the monthly capacity being scrapped in 1H 2017.

Chart: Global containership capacity scrapped (2014 to 2017)

Chart: Global containership capacity scrapped (2014 to 2017)

FACTORY CLOSURES IN CHINA REDUCE CARGO SHIPMENTS

Production halts and factory closures in China in response to the government’s extensive environmental inspections to curb excessive pollution have resulted in lower cargo shipping demand from China.

However, pent-up demand could drive a rebound in spot market container shipping rates when these factories reinstate their production again when the inspections end and/or when environmental regulations are complied.

CHINA’S NEW EXPORT ORDERS LEADING INDICATORS HAVE MODERATED

China’s new export orders PMI has moderated to 50.4 from 52.0 in June. Although still expansionary, this is the lowest PMI level since January 2017.

WEAKER US DOLLAR DAMPENS IMPORT DEMAND

The US dollar has weakened 4% against the Chinese yuan since the end of June 2017 which has a dampening effect on import demand. In addition, the US retail inventories-to-sales ratio suggests limited scope for significant restocking in the near term.

INTRA-ASIA PACIFIC SPOT MARKET FREIGHT RATES HAVE HELD UP AND REMAIN SIGNIFICANTLY HIGHER Y/Y

In contrast, the Intra-Asia Pacific spot market freight rates are doing better. China-South East Asia and China-Australia/New Zealand spot market freight rates held up w/w and are still 181% and 37% y/y.

This could drive investors to switch to carriers with larger Intra-Asia exposure and avoid carriers with large exposure to the Asia-Europe/North America trade lanes.

 

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