Cautious Recovery for the Container Sector

Tuesday, April 20, 2010

Drewry’s latest Container Forecaster is optimistic that a market‘recovery is underway but cautions that close monitoring of key market drivers is essential as the patient is not off the at-risk list yet. The latest container trade data suggests we may have entered a real recovery phase but comparisons with the depth of the recession in 2009 must be treated with caution.

With a major carrier failure thus far averted and container volumes on the upturn, many believe this year will see a return to better times and profitability. But, it is still early days; a large number of post-Panamax vessels are due for delivery this year and most of the all important transpacific rate contracts have still to be signed.

It has to be said that the relationship between carriers and shippers has never been as fractious as it is now with both parties blaming each other over short shipments and so-called phantom bookings. It is clear that shippers will think long and hard before signing new contracts – some will change allegiances, other will seek comfort in using more partners as they try to secure their supply chains in 2010.

Neil Dekker, editor of Drewry Container Forecaster, commented on the current situation: “Drewry has for some time emphasized that carriers and shippers need to get closer to each other and that this in itself can only help to engender more rate stability. Shippers have been scathing of carriers and - with rollovers so prevalent – not without good reason. Yet many have also offered suggestions for solutions - an olive branch of sorts. Carriers might point out that shippers have enjoyed very low freight rates, but this outright hostility is no longer required.”

Improving environment
Headhaul volumes on the core east-west trade lanes have been improving since late 2009, hence Drewry has upgraded its forecast for the headhaul transpacific trade this year from 3.5% to 5.4%. However, the Container Forecaster authors remain cautious as leading indicators continue to send out mixed signals. One of the leading U.S. consumer confidence indices fell sharply in February and in China, the Li & Fung PMI index recorded a decline in new export orders for February (compared with January) – although this did pick up during March. Loaded inbound container volumes recorded at Los Angeles in March also fell by 2.9% y-o-y.

Neil Dekker again: “We have also noted robust trade volumes moving on the Asia to Australia and Asia to East Coast South America routes since the beginning of the year. The charter market has shown signs of improvement, some larger vessels are coming out of layup and a number of new services are being launched in regional and smaller trade lanes – all suggesting more positive signs.

“Healthier traffic flows have however, helped to give a slightly false impression of the current recovery since, in particular, carriers have constrained capacity on the transpacific trade. This year will be a very tough one for carriers to balance capacity against forecast demand and should too much tonnage be brought back in or too quickly, it is possible that the freight rate improvements, giving carriers much needed cash injections, could be derailed to some extent.”

In recent weeks, Drewry has recorded a slight softening by a few percentage points of spot rates in both the transpacific and the Asia-Europe routes. Six Asia-Europe strings will be re-introduced during the second quarter period indicating an increment of about 9.5% in headhaul capacity compared with 1Q2010. It is therefore vital for carriers that the current flows from China continue.

The introduction of new capacity on the transpacific trade has been restrained, although several new and previously laid up strings will shortly be launched. This might be welcomed by shippers who have been hit hard by rollovers prior to the Chinese New Year period, but it is also vital (for carriers) that tonnage is not introduced too quickly.

Higher east-west rates
According to Container Forecaster data, it is likely that shippers will pay considerably more on the headhaul transpacific this year than they did in the last 12 months… and many will do so in order to secure adequate space provision for this summer. However, it is too early to see exactly how carriers have fared with their negotiations. Shippers will also be wary of the minutiae of their contracts given that many were effectively ‘torn-up’ in January with the implementation of unprecedented carrier emergency revenue programs.

The new rate forecasts for the east-west trades for 2010 highlight the disconnect between what can only be described as a continuing poor global supply/demand balance. Rates including fuel are projected to increase 32.3% year-on-year due mainly to the expected success of carrier GRIs on the eastbound transpacific, the end of low Asia-Europe rates and the continued rise of fuel surcharges.

However, Drewry’s global supply/demand index remains below 90 (89), showing only marginal improvement over 2009.

Dekker added: “It should not be forgotten that while annual fleet growth last year turned out to be only 5%, approximately 500,000 teu that was not delivered will be operational in 2010. Global recovery is still at an embryonic stage and this is why we believe the industry needs to be cautious.”

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