Date: Tuesday, April 18, 2023
The Shanghai Containerized Freight Index (SCFI) — a closely watched measure of container shipping spot rates — has just risen for the third week in a row after nine months of continuous declines.
The SCFI came in at 1033.65 points on Friday, up 8% week on week (w/w). The China-U.S. West Coast route, which comprises 20% of the index weighting, jumped 29% w/w, to $1,668 per forty-foot equivalent unit.
“Freight rates have rebounded strongly on the back of the mid-April GRI [general rate increase], due mainly to rate increases on the trans-Pacific, Middle East and Latin American routes,” said Linerlytica on Monday.
The SCFI, which specifically measures cargo flows from China, is now up 14% from the cycle low of 906.55 points in the week ending March 10. The index suffered its steepest losses last September. Weekly declines this year (before the recent turnaround) have been muted.
Still no clear direction
The various spot indexes don’t paint a clear picture, however. They show a plateau at very low rate levels and no direction yet.
The Drewry World Container Index (WCI) global composite was flat w/w for the week ending Thursday. Unlike the SCFI, the WCI showed Shanghai-Los Angeles spot rates down 4% w/w, to $1,674 per FEU.
The Freightos Baltic Daily Index (FBX) global composite was down 2% w/w as of Friday. The FBX China-West Coast assessment was flat w/w, at $1,005 per FEU. (The FBX global composite then surged 14% on Monday versus Friday, to $1,601 per FEU.)
Platts’ North Asia-West Coast North America spot-rate assessment was up 19% w/w, to $1,250 per FEU, mirroring the trend seen in the SCFI. In contrast, Xeneta’s XSI-C short-term rate index for the Far East to the West Coast was essentially flat w/w (down 0.5%) at $1,151 per FEU on Friday.
Talk of a spot-rate floor raises two big questions when considering the broader outlook for liner earnings: What about contract rates, which are more important than spot rates, with trans-Pacific annual contracts for May 2023-April 2024 about to debut?
And what about the massive wave of newbuildings that began hitting the market in March, a deluge of new tonnage that will continue through at least 2025?
For context on talk of a market bottom, FreightWaves interviewed Omar Nokta, shipping analyst at Jefferies.
Next driver: ‘End of the destock’
“Up until recently, you could almost characterize the spot market as ‘no bid,’” Nokta said on Monday. “No matter how much capacity was taken offline, [spot] freight rates were just not budging. But these GRIs they’ve just put in look a bit stickier.
“Zim [NYSE: ZIM] continues to be the most talked-about stock in my coverage universe,” said Nokta, who covers a wide range of shipping equities from tankers to dry bulk to container shipping. With around $90 million in Zim shares bought and sold each day, “it’s very actively traded,” he said.
Zim’s heavy focus on the Asia-U.S. market (mainly to the East Coast) and its high spot exposure make it “the go-to name — it’s probably the best way in Western markets to express a view on freight rates. That’s one reason why there have been a lot of bets put on it recently.”
Zim’s stock, as with other container shipping stocks, fell hard since the boom-time peak. But it closed Monday up 24% from April 6.
Nokta said of the liner market in general: “It has been so ugly that [investors] generally think this is as bad as it gets and the bottom we’ve seen is probably too extreme, because it’s destocking [of inventories] and not reflective of actual demand. And the moment the destock is over you’re going to have more activity and that’s going to come up against a trans-Pacific market with 20%-30% of its capacity removed.”
Investors are thinking, “The industry could have issues over the next two years as new ships deliver, but in the near term, what’s going to drive the shares is the end of the destock and beginning of the restock.”
Liner stocks vs. ship-lessor stocks
Shares of container lines like Zim and container-ship lessors like Global Ship Lease (NYSE: GSL) rose with rate momentum during the boom and fell when rates collapsed after the peak.
One of the pitches for container shipping stocks more recently relates to value: that stock prices overshot to the downside and do not reflect the current value of the companies.
The value thesis “has been easier on the ship-lessor side because there’s asset value and there’s visibility,” said Nokta. For the lessors — the companies that provide leased tonnage to the liner companies — both time-charter rates and container-ship asset values have risen off their lows.
The Harpex index, which measures global time-charter rates, has been on the upswing since late February. Ship brokerage Braemar reported Monday that “the buzz in the container [ship] chartering market continues” and “asset prices continue to have some upward momentum … as charter periods in some sectors noticeably lengthen.”
According to Nokta, the value pitch on the liner side “has been harder because these companies are in a net cash position and they’re trading below book value so there’s definitely a recognition that they’re not expensive, but investors are trying to gauge: How cheap are they? How much should we be pricing in for loss-making [periods]?”
Liner behavior despite record orderbook
One sentiment factor in liner stocks’ favor: Liner companies are not behaving in any way like their industry is facing imminent disaster, despite loss-making freight rates and a record-high newbuilding orderbook.
“From the outside looking in, you would say: They’ve all paid out monster dividends. They’re continuing to order ships. They’re time-chartering more vessels. Absent looking at spot rates, you would say everything is fine. But when you look at freight rates, no one is profitable on a mark-to-market basis, so what is happening?
“I would say liners have a history of being aware of their market’s dynamics. They see the trends because they’re actually living them minute by minute,” Nokta told FreightWaves. “They saw what was happening three years ago [at the beginning of the COVID boom] before a lot of us did.” In other words, liners’ current actions may imply that their future prospects are not as dire as today’s dismal freight rates suggest.
What of the massive orderbook? “I would say that a lot of these orders are orders the liners wanted to place four or five years ago but they didn’t have the cash flow then,” said Nokta. The new ships will also be much more cost efficient, he emphasized.
“I think they’re ordering ships in anticipation of replacing their existing portfolio. The liners can lower their unit costs and make the existing fleet more of a shipowners’ [lessors’] problem.”
Both liners and the container-ship lessors entered this downturn “with very strong cash positions and very good balance sheets.” As a result, the liners “will not have to fight for market share” to the degree they did in past downturns, Nokta maintained.
Liners typically own around half their fleet and charter the other half. They can take delivery of their newbuildings and let existing charters roll off to the extent necessary, leaving it to the ship lessors to “figure out how they’re going to redeploy those [older] vessels.”