Container freight rate opens skyrocketing mode, what reason?

Recently, the chairman of a joint-stock company made a speech on social platform, calling on shipping companies to increase capacity, so as to achieve the purpose of reasonable adjustment of freight rates, which triggered the industry's attention and discussion on the recent model of soaring container freight rates.

It is reported that container freight rates have been soaring since June. According to the latest data of Shanghai Export Container Freight Index, the freight rates on Asia-Europe, Asia-West America and East America routes have all been rising. The average number of shipping space on the Mei-Xi and Mei-Dong routes of Shanghai port is at the full load level, and some shifts even have storm cabins. Supported by fundamentals, most airlines raised their own booking prices, spot market freight rates rose. Both the West and East U.S. markets have seen freight rates rise to their highest levels since 2019. Why have container rates skyrocketed? What are the future price trends?

Is the shipping company deliberately controlling capacity?

According to the latest figures from FREIGHTOS briefing, container rates on china-West Coast routes have risen 11% since last week to a record high of $3,058 /FEU, and are up 110% from the same period last year. China-u.s. east Coast freight rates also edged up 3% to $3,466 /FEU, up 30% from a year earlier. "The trans-pacific Eastbound market is going crazy," says Nerijus Poskus, vice President and head of global shipping for Flexport, a digital freight forwarder. It says the current market situation is unprecedented.

Is the surge in freight rates the result of deliberate capacity controls by shipping companies? In the second quarter of this year, the major shipping alliances "cancelled" a large number of Asia-West Coast trips to ensure freight rates. As things stand, however, shipping companies are not deliberately continuing to use the market tactics that once led to a view of price gouging.

"Most of the empty flights have been restored," Alphaliner said in its weekly report. The company also launched five new regular routes, adding the equivalent of 35,000TEU a week. In addition, the shipping company has deployed a number of additional one-time voyage. Despite the gradual restoration of empty flights and even the introduction of new capacity, spot rates have surged to record levels, According to Alphaliner.

Sea Intelligence, a shipping consultancy, estimates that shipping companies' capacity in Asia and west Coast markets rose 13.1 per cent in the third quarter from a year earlier, the strongest growth in capacity in a decade.

A sustained recovery in internal and external demand is the main reason

Some analysts believe that the freight rate is rising at an alarming rate, not because the supply of shipping capacity is too small, but because the US foreign trade demand for imports is too large. While capacity is at its highest level since January, shipping from China to the U.S. has been overbooked during the peak season earlier this year, and rates have climbed.

China Citic Construction Investment Korea said that the US imports of goods continue to exceed expectations, has returned to the pre-epidemic level, the year-on-year growth rate has even turned positive, indicating a relatively strong DEMAND in the US. From the main types of goods, mainly household goods, electronic products, fitness equipment, bicycles and so on.

"Our customers are selling very well, which is why more goods are coming into the United States. They sell more online. "Eighty percent of Flexport's top 100 customers are growing year-over-year, and their market share is certainly growing."

"People are still buying," Poskus said. Even those who are out of work. They have the support of the government, so they are still rich. They no longer spend money on restaurants, haircuts, gas and commuting. But when they have cash, they buy more stuff. In particular, they are buying more and more things online.

It's worth noting that there are three explanations for the strength of U.S. imports. One is that cargo volumes are moving up in the peak season. According to the NRF, "August is expected to be the busiest month of the July-October 'peak' season, when retailers will import heavily for the winter holiday season." "The peak season is likely to come early this year," which means that fourth-quarter freight volumes are likely to decline.

Another theory is that fear of the virus has brought forward demand for shipments. U.S. importers hope to get their products to warehouses and distribution centers before states lock down again in the fall.

Another is that the government subsidies that stimulate consumer spending will eventually end. In other words, the consumption slump caused by the new pneumonia outbreak was not averted, but delayed.

Some experts said that due to the decline in global container shipping demand due to the epidemic, container shipping companies stopped shipping a lot of capacity in order to reduce losses. However, since June, the recovery of shipping demand has been more than expected, and the part of the US line at the full load level has exploded, while the loading rate of the European line is about 95%, which leads to the increase of freight rates due to the shortage of capacity supply.

Su Baoliang of China Merchants Securities and others said that July's domestic import and export data exceeded expectations, indicating that the global reliance on China's foreign trade is relatively obvious, supporting the concentrated transportation market is expected to emerge from the dark hour.

July's import and export figures also appear to be further evidence of the strength of the seaborne trade. In July, China's foreign trade imports and exports continued to maintain both positive growth, and foreign trade exports achieved double-digit growth for the first time. In July, China's exports and imports totaled 2.93 trillion yuan, up 6.5 percent. Exports totaled 1.69 trillion yuan, up 10.4%. Foreign trade imports totaled 1.24 trillion yuan, up 1.6%.

The chartering market rebounded quickly

The surge in rates has also increased optimism among market participants about the long-term prospects of major shipping markets, and the container charter market has rebounded at a blistering pace.

At present, the rent level of large container ships has risen back to the level before the epidemic, and the rise of large ship market has further promoted the rent of relatively small post-Panamanian and traditional Panamanian container ships to rise significantly.

Some market analysts even said that the current large container ships above 7500TEU have been "out of stock". As there are no more suitable vessels to choose from, charterers (consolidation companies) have had to go after relatively small container ships with capacity ranges such as 5300TEU-6800TEU, which has resulted in a rent increase of more than us $20,000 per day for such ships.

The container charter market has been rising since mid-June and is up about 20% so far.

ConTex said in its latest weekly report that the container chartering market has recovered significantly faster than it has declined since the COVID-19 outbreak and appears to be experiencing a V-shaped recovery.

The new ConTex index is up 19 points from last week's close to 368, although that is still a low number from a historical perspective, the company said. The number of empty container ships has fallen significantly in the past few weeks, suggesting a similar trajectory in the short term.

MSI noted that the market recovery has pushed the rental rates of 8,500TEU non-environmental container ships to more than $20,000 per day, and 9,000TEU modern environmentally friendly container ships to more than $30,000 per day.

It expects the market outlook for time charters to improve further in the rest of 2020. Limited capacity supplies for mid-sized ships could lead shipping companies to look at smaller vessels. Unless shipping companies seriously miscalculate capacity planning, the healthy market for large ships is likely to continue.

How long will the high rates last?

One theory is that some of the current strength in imports is due to earlier shipments in the peak season, which could mean a decline in shipments in the fourth quarter.

According to the National Retail Federation, August is expected to be the busiest month of the "high season" from July to October, when retailers will be stocking up on imports for the winter holiday season, which is likely to come early this year.

"I don't think this is sustainable," Poskus concluded. "Personally, I think the market will cool off after the National Day holiday golden week in China. You may see a small peak after the Golden Week. Then, from about mid-October to December, I expect the economy to slow. So I think the fourth quarter will be different.

The analysis of Dongguan Securities shows that the demand end of the centralized transport industry is improving, the new supply end is limited, ship dismantling is expected to increase, and the supply and demand pattern continues to improve. China's economy has been making upward repairs since February, with its GDP down by 6.8% year-on-year in Q1 and +3.2% year-on-year in Q2. China's PMI has bottomed out and picked up, while those in Europe and the US have continued to improve. At the micro level, car sales, for example, rose 16.4 per cent in July from a year earlier, a marked improvement. In addition, data from the United States and Europe also showed significant improvement, further validating the economic improvement judgment. So demand is picking up; At the supply end, the ratio of existing orders to capacity is at a historical low, meaning that future new capacity will be limited. Shipwrecks are expected to pick up. Overall, the supply and demand pattern has improved and CCFI prices have stabilized and picked up. There is still room for improvement.

Some experts said that the global fight against the epidemic has led to a decline in the demand for daily necessities, so the recovery speed of container throughput of the port will not be too fast. It may show a slow recovery from the third quarter of this year to the first quarter of next year. Among them, as idle capacity gradually returns to the market, freight rates will drop significantly in the fourth quarter. However, the growth rate of future capacity supply is not high. If the demand keeps stable growth, the average center of future freight rate may be higher than that of the past decade.

In general, the trend of container shipping prices is restricted by many factors. In addition to macro factors such as global economic recovery and epidemic recovery, it is crucial for carriers to grasp the control intensity of shipping capacity and whether it can match the changes in demand.

Looking forward to the container shipping market in the second half of the year, it is estimated that the global epidemic in the second half of the year will hardly go out of the platform period, and before the epidemic goes out of the platform period, the trend of concentrated freight rate will be dominated by high and narrow fluctuation. As the epidemic passes the plateau, freight demand starts to pick up steadily, carriers become more confident, and the control over freight capacity will be relaxed. The fluctuation range of freight rates will return to normal, and freight rates will be re-priced.