Current Market Conditions

The current market is unprecedented, in its balance between carriers and customers, its volatility, and its supply and demand ratios. For many years the market has been largely stable and pretty much dictated by price. Occasionally there will be a dearth of equipment or removed vessels from the schedule or an unscheduled event but in the main this has been rare. 

These factors keep a competitive level between the carriers because they can all offer services with ample space and equipment. Traditionally their challenge has been filling up large ships which creates a market where a customer makes their choice as much on transit times, service levels and reliability as it does price. 

This changed as we know back in October due to the pent up demand from frustrated orders due to COVID, and carried through to the CNY. This period and slightly before saw increased lay time in ports, missed calls and the subsequent problem of equipment rotation from Europe to Asia being reduced significantly.

All in all a perfect storm, especially when you add in a second wave of COVID in Europe at the start of the year.

Just after CNY, we saw a welcome dip in pricing and this was widely anticipated to continue in what is usually the quietest quarter. The Suez issue changed that dynamic. Due to vessel delays in the canal, and some having to take the long way round, the schedules have become completely skewed. it’s a similar principle to a cancelled train not turning up because it has been stuck somewhere elsewhere en-route. It means the schedules cannot run on time and it takes a period of adjustment to fix. In this case, the usual round trip period is somewhere between 2-3 months, and it will take this amount of time to have the vessels back in sync. The problem this has created is that its caused an additional delay in vessels returning with empty equipment, and without the empty equipment orders can’t be reloaded. Not forgetting it was already a big problem before the Ever Given running aground.

It has amplified a simple case of under supply and over demand which was further driven by more people than usual on the side-lines waiting to move goods after CNY.

Factories in the meantime have continued to produce and need to free up space to fulfil more orders. In practice the equation is that every available container, there are multiple interested parties to take it. 

It inevitably drives up prices and it creates a feverish and auction like atmosphere. The shipping lines are the market makers and all of the cards are in their favour. They have adopted a bullish “take it or leave it” attitude, and have become quite creative in the way they squeeze rates up still further. They know they are on a winning streak so it’s in their interests to maintain that for as long as they can.

As is stands the usual “FAK” or Freight all Kinds market, which is what most non long term contracts are shipped on doesn’t exist as we know it. Whilst these rates are publicised it’s made very clear that there is no guarantee when or if anything will be shipped on those rates or conditions However if you are willing to pay a premium, then oddly enough the carrier will allow the door to be unlocked.

What it means on the ground is a free for all, and a scramble. Rates and conditions can change quickly and arbitrarily. This is why we are recommending to our customers that we try and combat these tactics by being able to move quickly at origin by empowering our partners to act in real time. There are even markets within markets. For example Ningbo and Shanghai always trade together at the same level. No longer. Due to a large imbalance of equipment, shipping from Ningbo attracts its own premium of USD 600-700 viz a viz Shanghai. 

You can see how this is translating for the lines. Only this week Maersk Line issued their Q1 results. They were in excess of 2 Billion USD, and was the best result in their 100 year + history. A couple of years ago, they were trumpeting a result of around USD 1 Billion for a year as being historic. COSCO, OOCL and even the perennial struggler Yang Ming have reported similarly eye watering returns. So it demonstrates how and why this suits them to maintain the current conditions for as long as they can.

Future Outlook

The short term of May and June looks choppy and its likely that prices will continue to remain high for the rest of this period. Q3 begins peak season shipping. However, during this period there are three chinks of light in my view. Firstly most carriers have committed to purchase and inject more equipment into the Global market. Maersk about 350K of TEU, Hapag Lloyd and CMA around 180K each. This will greatly help the equipment crisis. Secondly, during Q3 and barring any more mishaps in Suez or elsewhere, the schedules will come back on stream and that will bring some stability. Thirdly COVID restrictions in Europe, the US and Asia should ease further, bringing more normality to operations. The interesting and as yet unknown factor is whether carriers will add more capacity or not. If China sees an adverse effect to their Exporters you might see some political arm twisting to fill in the demand.  I would expect that in Q3 rates will remain very high by historical standards but will come off of these record levels. Looking even further forward it’s been predicted by a company called Drewery’s whom follow the performance of shipping lines that they can expect outstanding returns until 2023. So fair to say that the days of USD 1500 per container are not coming back any time soon but this current insanity should cool off over time. 

 Further news articles:

Freight rate 'contagion'

 a $2bn Q1 profit bonus

charging 'what they like'

 Shipper-carrier relations

two more years of freight rate pain