Market situation - container flows - August

Asia

The Shanghai Containerized Freight Index (SCFI), which monitors the spot rates for Chinese export cargo, dropped at the end of August by almost 10%. This decrease in rates (and thus container exports from China) is happening much faster than predicted by many reports from the past months.

At the beginning of this year the SCFI topped a new record of 5.110 points, but by the end of August it had landed at 2.847 points. This decrease has not been gradual but very steep in these last weeks: it took until deep into the second half of July to drop below 4.000 points. The current level of the SCFI is the lowest since the first half of April 2021. (Historically, the level is still relatively high, as the average index between 2015 and 2022 was below 1.000 points.)

Usually there is a peak volume ex Asia during the summer months. This has not been the case this year. Some expect to see a peak at the end of September to cover the Golden Week Holiday in China (1-7 October). However, with the volume drop in the market it is unlikely that this will have any effect on the rates and/or on the available space on the vessels.

In the event of a steep decrease, the shipping lines usually take out vessels to artificially create some pressure on the available space. The aim is to slow down the drop or at least keep the rates above a certain base level. When analyzing the current information, it seems that not that much capacity is going to be taken out for the time being so not much effect is expected.

Europe

In the UK, workers in the Port of Liverpool have confirmed strike action from 9th September to 3rd October. The workers are responsible for the lifting/dropping of containers for intermodal deliveries/pick-ups. This will obviously affect the already congested ports of the UK. In Felixstowe, the UK's largest port, the strike continues, again resulting in a lot of UK cargo being dropped in Zeebrugge, Belgium for temporary storage until the cargo can be delivered to the UK.

In Germany, possible industrial action in the near future (read: work laydown) has been avoided. An agreement has been reached to pay port workers more. The German ports were already among the most expensive in terms of local costs, and it is most likely that the higher salaries will result in an increase of the local cost (such as the terminal handling charges). This can impact cargo flows even more as some ports also face draft restrictions and heavy congestion.

Of all industrial regions, Europe seems to be suffering the most from the current global energy crisis. The production of energy in Europe is much lower than in North America and China and with the current troubles with Russia, the supply of Russian gas has been drastically reduced. This is causing a lot of factories in Europe to reduce production, as they are simply no longer competitive with similar products produced in other regions.

Although the disruption of the global container market and supply chain is not that far in the past, it seems that many companies have already forgotten the troubles faced or some are simply being forced to source from Asia to ‘keep the shop open’. However, not all companies are in the position to source elsewhere in order to remain competitive. More and more factories are being forced to put employers on temporary unemployment.

North America

Although the rates ex Asia have dropped, as you can read in the ‘Asia’ segment, the rates remain exceptionally high out of North Europe to North America. In Flows magazine they have made the comparison as follows: ‘The distance between Antwerp and New York is approximately 1/3rd of the distance between Shanghai and Antwerp although you pay a similar rate’.

The beneficial EUR-USD value ratio will give some explanation for the remaining high volumes out of Europe. Also, full warehouses and chassis shortages (and port congestion) this year are still causing delays, which could delay rate adjustments further on.

Rates for the West Coast are also ‘softening’ due to the lowering volumes ex Asia in combination with less congestion in the ports. The threat of strikes however remains as the negotiations for a new agreement for the longshoremen continues.

General

Overcapacity expected in container industry

A report from the British bank HSBC asserts that the downward spiral for the container industry in 2023-2024 will be inevitable due to overcapacity on the container market.

In the report, HSBC predicts that the spot rates could quickly drop towards levels which we have not seen since ‘pre-pandemic’. However, they also predict that contract rates will remain higher and will not reach the ‘pre-pandemic’ levels.

They base these forecasts on the fact that the worldwide container trade will decrease by 2% in 2022 and by 3% in 2023. According to their business models, the container movements will only recover by 2.5% in 2024. If you put this against the shipping capacity which will be added to the market in the coming years – 6.2% in 2022, 6.5% in 2023, and 8% in 2024 – this can only result in a downward trend in container freight.

We do need to make an important remark about the above. We could only access the summary of the report and therein nothing is mentioned about the capacity reduction that will take place as a consequence of the IMO 2023 emission restrictions. The new, stricter emission limitations will put an additional stress on the available vessel capacity. With the current technologies available (scrubbers, VLSFO fuel blend, etc.), the only way to comply with these new regulations for many vessels is simply to slow down to reduce fuel consumption and the emission of polluting particles. Depending on the source this might mean a capacity decrease between 5% and 15%.

More social unrest expected

At the end of the year (and possibly continuing into 2023) more and more strikes, protests and other forms of social unrest are expected in all sectors. The global energy crisis and uncertain future creates a lot of frustrations and anxiety among people, and we have already seen many work laydowns in the past months. This trend will most likely continue in 2023.

Carriers, NVOCCs and other parties are reaching out to shippers to secure volumes

The reducing spot market is starting to have an impact on long-term contracts. Most shippers are still paying record high rates, and switching between spots or rates which have been agreed upon within three months has never been so attractive.

To prevent a loss of cargo, some carriers are reaching out spontaneously to revise current contract rates. It goes without saying that this depends on the duration of the contract, the contract level and the affected trade.

But it seems especially that a new phenomenon has emerged out of Asia. This new approach is not initiated by the shipping lines but by the NVOCCs (*) and big freight forwarders who have agreed on contract rates with strict validities and penalty clauses alike. *(A Non-Vessel-Operating Common Carrier (NVOCC) is an intermediary between the shipper and the vessel operator that issues their own bills of lading. A freight forwarder is an authorized agent acting on behalf of the shipper.)

With volumes taking a turn for the worse due to decreased demand, these strict volume contracts still need to be fulfilled and some kind of ‘penalty trading’ is pushing the contract holders to find alternative cargo in order to compensate for the fines they will have to pay if they do not fulfill the agreed volumes. It is likely that even in a very low market this phenomenon will continue, as every alternative container will reduce the exposure for the contract holders. This practice will only stop if shipping lines can organize themselves to block this, as it is not in the contractual agreement, or when these types of contracts cease to exist.

The shipping lines, in turn, are trying to keep control and reach out to shippers and forwarders to revise contracted rates, as they want to avoid missing out on volumes or having discussions about levels they do not want to drop to (yet).