Economic uncertainty leaves ocean carriers cautious despite strong peak season
2020 will be remembered as a watershed year for container shipping.
The sector has never been confronted by a crisis that has stifled trade and economic growth like the Covid-19 pandemic. And container shipping lines have never pulled through a global crisis without engaging in a price war.
Whatever happens next, the box shipping world seems certain to have entered a new normal. For the first time since 2010 and despite year-on-year declines in revenues and tonnages, the top ten box carriers racked up operating profits per twenty-foot equivalent unit (TEU) transported in the second quarter.
Falling bunker prices helped, as lines benefited from lags in adjustments to Bunker Adjustment Factor (BAF) indexes during that period. This enabled them to benefit from lower prices even while charging customers BAFs based on the higher prices before adjustment.
As the cost of oil plummeted, the prices of IMO 2020-compliant very low-sulfur fuel oil (VLSFO) and standard bunker fuel have also converged. Under pressure from dissatisfied customers, a number of leading carriers eventually scrapped low sulfur surcharges (LSS) in early September.
Although lower operating costs have helped container lines during the pandemic, their refusal to embark on a price war has bolstered bottom lines most. Instead, aided by the alliance system and consolidation of recent years, carriers collectively withdrew huge amounts of capacity via void sailings and lay-ups, prompting freight rates on the major East-West trades to retain their buoyancy before climbing.
Rates going strong
The upward creep of rates continued as demand from the U.S. and, to a lesser extent, Europe began to bounce back during the traditional summer peak season. Lines, understandably cautious given the general economic uncertainty, were slow to counter rising demand with capacity additions.
The result was rates and rollovers spiraling, and equipment shortages in Asia and North America worsening. The spot freight rate explosion and supply chain disruption continued into September with trans-Pacific freight rates hitting record levels.
Shanghai-Los Angeles spot freight rates were pushing US$4,000 (€3,350.50) per forty-foot equivalent unit (FEU) on September 10, indicating a 154 percent year-on-year increase, according to the World Container Index assessed by shipping consultancy Drewry.
On the same date, Shanghai-New York, Shanghai-Rotterdam and Shanghai-Genoa rates were 78 percent, 41 percent and 38 percent higher than a year earlier respectively.
In particular, the hike in ocean freight rates into the U.S. has been accompanied by soaring intermodal rates and capacity shortages, adding to the ongoing logistics logjam caused by rollovers and a lack of box availability in China.
The spot rate spike has occurred, even though carriers have now rushed capacity back. “The inactive container ship fleet dipped below the 1m TEU mark in August for the first time in 2020 as lines resumed several suspended services on the Far East–North America and Far East–Europe routes, “ noted Dominique von Orelli, Global Head, Ocean Freight, DHL Global Forwarding in DHL’s September Ocean Freight Market Update.
The number of ships without employment dropped to 198 units (799,643 TEU) at the end of August, representing just 3.4 percent of the total containership fleet, according to the latest survey by container shipping analyst firm Alphaliner.
The findings also revealed that the average weekly nominal capacity between Asia and Europe rose from a low of 340,000 TEU in May to 400,000 TEU (+17.6 percent) in September, which is only 4 percent below last year’s figures.
Peak season approaches
Several concurrent trends have been fueling the demand bounce.
Traditional peak season factors, such as retailers restocking ahead of winter holidays and consumer events like Black Friday, have played a part. This year, there is also a greater focus on e-commerce then storefront markets, and more emphasis on work-at-home products than heavy industrial and automotive cargoes.
“Demand has also been stimulated by many shippers rushing shipments to avoid potential ‘second wave’ coronavirus lockdowns, and Chinese factory closures for the October Golden Week national holiday,” explained von Orelli.
The upcoming eight-day public holiday has prompted most carriers to announce further blank sailings on Asia-Europe services to help maintain full ships and freight rate levels — a move unlikely to dampen claims that lines have been capitalizing on the Covid-19 pandemic.
According to Alphaliner, the Shanghai to California lane is now the most profitable ex-China trade for box carriers. Spot rates between Asia and North Europe exceeded Asia-California rate levels at the start of the year, but are currently delivering the lowest revenue per nautical mile of all ex-China deep sea routes.
For carriers carrying the same box from Shanghai to Los Angeles, the earnings per nautical mile are more than three times higher on the Asia-U.S. West Coast trade. This means increased profits as carriers need fewer resources, ships and equipment on a shorter trade. A typical Far East-North Europe service requires the deployment of some 12 ships, whereas six ships are sufficient for a Transpacific southwest loop.
The boost in earnings that carriers are enjoying in the current market is, however, now attracting the attention of competition watchdogs.
Amid soaring rates, equipment shortages and rollovers, Chinese regulators are now investigating liner pricing on the trans-Pacific and could interfere to ban spot rate increases from China to the U.S. Shipping line COSCO has since withdrawn suspended services and canceling scheduled general rate increases (GRI) according to reports.
Should the investigation continue, more carriers are expected to follow, setting the stage for an uncertain last quarter of the year.