The increases in freight rate levels appear to be virtually without end. From an overall market perspective, the combined Freightos Baltic Index (FBX) was up 400% at the end of July 2021 versus end-July 2020.
And this should be seen in the context that the beginning of 2021 saw the FBX level already up 130% compared to the level immediately prior to the pandemic outbreak at the end 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. As an example, Hapag-Lloyd just upgraded their earnings expectation at the EBIT level for full year 2021 to be in the range of 7.5-9.5 Billion USD. 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.
As such it is also clear that the question becomes one of when, not if, the rate levels will come down again. The sheer level of profitability will entice the investment in added capacity for existing players, especially niche players with a desire to grow.
As such it is also clear that the question becomes one of when, not if, the rate levels will come down again. The sheer level of profitability will entice the investment in added capacity for existing players, especially niche players with a desire to grow. It will also open the door for new entrants as already seen in the Pacific trade.
But when will the rates then begin to abate? In order to answer this question is it necessary to understand the core reason for the capacity shortage driving the high rates.
Demand is not the primary source of this issue. Data from Container Trade Statistics (CTS) show that global container demand is only up 5.5% for the first 5 months of 2021 versus the same period in 2019. This is equal to a development where global demand has grown just 2.7% annually for the past two years. Looking at the market situation in 2019 it is clear that such global demand growth should be well catered for. The data for May, which is the newest from CTS, furthermore, shows that for that month demand was only up 1% compared to the same period in 2019. Yet we also saw the FBX rate index increase 24% from the first week in May to the first week in June. Not to mention that the rate index is 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.
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. 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.
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.
The last time a similar operational disruption was seen was on the US West Coast in 2015 as part of a labor dispute. Back then it took six months to get back to normal schedule operations for the carriers – and this was in a situation of no other disruptions impacting the clean-up elsewhere.
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. 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.
Source: The Baltic Exchange, Vespucci Maritime