BCOs in renegotiation mode as rates slide

Date: Wednesday, September 7, 2022
Source: Splash 24/7

With freight rates in free-fall shippers are busy renegotiating their contracts with containerlines, who are facing up to the reality that the liner party is fizzling out.

The Shanghai Containerised Freight Index (SCFI) spot box freight rate index stood at 2,848 points on Friday, down 10% week-on-week but remain still more than three times the 2019 average. Rates on the Shanghai-US west coast route fell by more than 20% week-on-week to $3,959 per feu. Overall, last week’s SCFI performance was the worst weekly drop since 2016.

FBX futures indicate China to US west coast rates are close to $3,000 per feu for November including the bunker adjustment factor and are at $2,500 for Q1 next year.

While long-term box freight rates continue to climb they are finally showing signs of coming under pressure too.

“I don’t know a single medium-large BCO who is not renegotiating right now, or gearing up to do so within the next month,” commented Bjorn Vang Jensen, a vice president at consultancy Sea-Intelligence, via LinkedIn.

There’s plenty of economic data lending credence to the growing feeling that liner fortunes are in for a reversal and this year’s peak season has failed to manifest.

Chinese exports rose 7.1% in August from a year earlier, slowing from an 18% gain in July, official customs data showed on Wednesday.

“It seems the export softness arrived in earlier than expected, as recent shipping data suggests that demand from the US and EU has already slowed as shipping prices have been falling significantly,” Zhou Hao, chief economist at Guotai Junan International, told Reuters.

Across the Pacific, the downturn in US manufacturing is also cause for concern. The US manufacturing PMI has fallen from 63.7 in March last year to 52.8 last month.

“When production slows, demand for labour weakens, weighing on household incomes. Consumers in turn cut back spending, including expenditures on imports. When US demand slows, finished good exports from other countries decline,” a recent report from Singapore-based Eastport Maritime suggested, pointing out how South Korean exports have slowed from over 40% year-on-year growth last year to just 6.6% year-on-year in August.

Summing up why rates are in decline, Lars Jensen, CEO of consultancy Vespucci Maritime, highlighted three key factors in a recent LinkedIn update.

“We are faced with a trifecta of events impacting the strength of the market: Continued injection of more vessel capacity due to diminishing bottleneck effects, weakening sales prospects in North America and Europe where inflation and potential recession looms causing importers to worry about an inventory overshoot and continued wide-scale shutdown of production in China caused both by Covid as well as power issues related to low water in the Yangtze river. All indications are therefore pointing to a continued downwards trend,” Jensen wrote.

Spot rates on the main hauls are going “clearly downwards”, Peter Sand, chief analyst at freight rate platform Xeneta, told Splash.

“The trend will stay like that as the peak season is cancelled, demand is falling, schedule reliability is moving slowly up, and congestion is coming down in certain places,” Sand said, saying this pattern would be felt most keenly on the eastbound transpacific, the trade with the most non-alliance carriers.

Spot rates do remain profitable, however they are already down by 42% since the end of February on the main two tradelanes, Asia-Europe and the transpacific, according to data from Xeneta.

“Latest rates offered by transpacific carriers have already breached the $3,500 mark, guaranteeing further drops in the published rate indices in the coming weeks with all tradelanes out of Asia remaining under pressure,” the latest weekly report from Linerlytica reported, adding that the freight market weakness is spreading quickly to the charter markets, with a rising number of sublets being offered by carriers who had previously committed to long term vessel charters only to find the current rates unprofitable for them to continue.

Some analysts are pinning their liner hopes on long-term contracts holding up.

In widely read recent report looking at Q2 profits, liner veteran John McCown, who heads up Blue Alpha Capital, argued that too much focus had been spent by analysts and media this year on the declining spot market, which he said accounted for only 10% of boxes shipped, a ratio contested by other experts. Contract rates remain massively elevated and are the reason McCown is forecasting liner shipping will make a cumulative net profit of $244.9bn for the full year of 2022, a remarkable 65.2% improvement over 2021’s record results.

“The folks who focus on spot rates and are predicting a near-term earnings collapse are substituting narrative for analysis and will be proven wrong. We may be at or near the peak, but no earnings collapse is imminent,” McCown wrote.

“As long as contract rates remain intact, the industry is likely to see a widening two-tier market differentiated by those carriers who have signed long-term contracts at elevated rates, and those relying on the softening spot market,” the latest weekly report from Alphaliner predicted.

Nevertheless, there is growing evidence that long-term rates are now coming under pressure.
“It’s only a matter of time before the long-term contract market begins to weaken at faster pace too,” Xeneta’s Sand warned today.

According to Xeneta data, the transpacific right now has a gap between the spot market and where long term contracts are signing of $2,000, whereas the gap on the Asia to North Europe tradelane is only $500 per feu.

The cooling of the container market from its record highs is having knock-on effects in other sectors that have profited from taking boxes onboard over the last 18 months with Drewry’s multipurpose shipping index in clear decline and dry bulk owners also having to get used to the fact that containers are an unlikely source of cargoes going forward.

“Container freight rates have declined significantly in the third quarter with slower growth in container trade demand in response to high inflation rate and endemic consumer pattern. After the third-quarter peak trade season is over, decontainerised trend is expected to be reversed and some of container spillover-related minor bulk cargo demand will gradually return to container boxes which would put backhaul geared dry bulk freight rates under further pressure,” commented Daejin Lee, lead shipping analyst at S&P Global Market Intelligence.




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