No short-term easing of freight rate levels in sight

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  • This huge rate spike comes considering that the FBX level was already up 130% in January 2021 compared to the pre-pandemic month of January 2020
  • When global demand only grows 1% and yet the rate level triples, the core of the issue is clearly capacity and not demand
  • In terms of the vessels, 10% of the global capacity is effectively removed from the market, leading to the acute shortages causing the rates to increase
  • The largest risk right now appears to be the possibility of further restrictions being implemented in China to prevent a spread of the Delta variant of the virus

The current short-term outlook for container freight is not for the very high rate levels to abate but to continue to increase, seemingly without end and driven by pandemic-related capacity issues, according to a maritime expert.

Lars Jensen, CEO of specialized container shipping consultancy Vespucci Maritime, in a new analysis said the combined Freightos Baltic Index (FBX) was up 400% in July 2021 versus July 2020.

Related read: Asia-US freight rates hit fresh highs in July: Freightos

FBX is the leading international freight rate index that, in cooperation with the Baltic Exchange, provides market rates for 40-foot containers.

Jensen said this huge price spike in July comes considering that the FBX level was already up 130% in January 2021 compared to the pre-pandemic month of January 2020.

“Such increases, and rate levels, are far beyond anything ever seen in container shipping. The level of profitability this conveys to the carriers is also beyond any previous precedent,” he said.

As an example, he said Hapag-Lloyd just upgraded their earnings expectation at the EBIT level for full-year 2021 to be in the range of US$7.5 billion to $9.5 Billion.

“For comparison this is the same amount as the EBIT for the all the major carriers combined in the 4-year pre-pandemic period 2016-2019—not including MSC which does not publish financial records,” he said.

Jensen argued that demand is not the primary source of the high rates but a capacity shortage.

He cited data from Container Trade Statistics (CTS) showing that global container demand was only up 5.5% for the first five months of 2021 versus the same period in 2019. Furthermore, the data for May 2021 showed that for that month demand was only up 1% compared to the same period in 2019. Yet the FBX rate index increased 24% from the first week in May to the first week in June and was up more than 200% compared to 2019.

Hence when global demand only grows 1% and yet the rate level triples, this clearly shows that the core of the issue is on the side of capacity and not demand, Jensen stressed.

On the capacity side the problem is that the ripple effects of the pandemic have caused serious bottleneck problems in the supply chain: ports, trucks, chassis, rail, etc. All of this leads to container equipment being tied up longer than usual as well as vessels laying idle waiting to get to berth. This removes capacity from the market, he said.

“In terms of the vessels, we are presently at a point where 10% of the global capacity is effectively removed from the market leading to the acute shortages causing the rates to increase,” said Jensen.

He predicts that rates will therefore come down when the bottleneck problems are solved.

“Presently the bottlenecks appear to get worse and not better. We are beginning to see the ripple effects of the Yantian shutdown and furthermore the system is put under pressure from shippers needing to ship Christmas goods as a normal part of the peak season,” he noted.

The largest risk right now appears to be the possibility of further restrictions being implemented in China to prevent a spread of the Delta variant of the virus, he further said.

This is what caused the partial shut-down of the port of Yantian in June leading to a market impact twice the size of the Suez blockage—and with ripple effects still actively impacting the market. Over the past days the number of local cases in China appears to be growing, and any impact on other major port cities would significantly impact the supply chains as well.

“Hence, unfortunately, the current short-term outlook is not for an abatement of the very high rate levels. Instead, the risk elements are leaning towards a higher likelihood for increases than decreases,” concluded Jensen.

Photo by Ronan Furuta on Unsplash