Weekly Insights: Container Freight Rates
Container Freight Rates
Higby Barrett is receiving some feedback about the container market that is very different than the bulk market. The container rates have been strong but have skyrocketed over the past few months. One comment from an individual that consults container clients said, “This is very real that the spot market is the only way to move containers. Clients have rates, but the carriers cannot move at the rate and tell the client, if you want to move it, we need to proceed at the spot quote rate. One client I looked at for the last six months spent about 18% higher than their published rate just to move the freight from Asia to the U.S.”
Drewry reported:
Drewry’s composite World Container index increased 19.8%or $862 to $5,220.99 for a 40 ft. container, which is 185% higher than the same period in 2020. Freight rate on Shanghai-Rotterdam surged 34%, or $2,276, to reach $8,882 for a 40 ft. container, and those on Shanghai-Genoa gained 18%, or $1,282 to stand at $8,380 for a 40 ft. box. Similarly, rates on Shanghai-New York increased 24%, or $1,233, to come in at $6,385 per feu. Freight rates from New York to Rotterdam grew 6%, or $39, to $690 for a 40 ft. container. Drewry expects rates to remain on the higher side next week.
World Container Index, Assessed by Drewry (dollars per 40 ft. container)
(source: Drewry Container Index)
Container Availability
The most common reason stated for higher container rates is China’s exports of container goods exploded higher during the pandemic. With China already enjoying a trade surplus, the surplus increased and not enough empty containers were being shipped back to China to be refilled. The stated reason does not make any sense. The oceangoing vessel returns full of containers whether the container is full or empty.
In fact, the head-haul move is typically the move that pays the bills. For this reason, a railroad will not wait for containers to be loaded with grain or soybeans. An extra container roundtrip is worth more than the freight revenue from the backhaul cargo. A railroad will stop and disconnect an empty unit train and connect a full unit train. In short, the container lines want the backhaul revenue only if the number of round turns is not decreased. In fact, the USDA reported, “On December 16, Federal Maritime Commissioners (FMC) Carl W. Bentzel and Daniel B. Maffei sent a letter to the World Shipping Council (WSC) in support of U.S. exporters. The commissioners shared FMC’s growing concerns that—in the face of unprecedented import demand—ocean carriers are refusing to carry U.S. exports. FMC’s concerns were in response to reports from U.S. exporters, USDA, and members of Congress. The letter cautioned “in responding to import cargo challenges, ocean carriers should not lose sight of their common carriage obligations to provide service to U.S. exporters.” Representing the liner shipping industry, WSC works with policymakers and other industry groups with an interest in international transportation.”
Higby Barrett believes the reason for the much higher freight rates is attempting to move higher than normal volumes while gearing up for the Chinese New Year. This combination has led to a container shortage in China. Chinese exporters, who pay top rate, are willing to pay higher freight rates to make sure the containers return as fast as possible. Even if the container stuffing operations can raise freight rates, the Chinese exporters want empty containers because unstuffing the containers is time-consuming, especially for containers sent into the countryside.
Grain and soybean container stuffing operations that compete with the bulk shipping system are not able to raise freight rates enough to slow down the railroads. For example, every $100 increase in the container rate results in a per MT rate increase of $3.55. Assuming $15 per bushel soybeans or $551.15 per MT, the cost increases .6%. Assuming $5 per bushel corn or $196.84 per MT, the cost increases 1.8%. To prevent the risk of containers breaking and a mix of containers loaded, the average load rate is closer to 16 – 18 MT. So, some of the freight can be offset by loading the container heavier.
Capacity Management
The long-term factor for higher rates is after the industry went bankrupt, it reorganized into fewer container lines. The advantage of fewer container lines is tighter capacity management discipline. After the last container freight rate spike, the industry grossly overbuilt capacity. Higby Barrett expects history to repeat, but last time it was a two-to-eight-year process. Due to the increased economies of scale, Higby Barrett believes the higher container freight rates will be over in one to two years. The higher port throughput levels and larger vessels should quickly expand capacity.
The primary reason for the expected increase in expanded vessel capacity is building vessels is a tremendous source of economic activity. With government financial backing encouraging excess construction, not overbuilding is almost impossible. For countries with large steel production capacity, the temptation is to build extremely large vessels for national security. Historically, this thought process results in very large navies, including support vessels. Not surprisingly, steel prices are at or near record highs despite a weak world construction market.
So, if you cannot control overbuilding, how does a container line manage risk? The railroads learned long ago that owning rolling stock is expensive and leads to financial turmoil. The reason being shippers always want access to transportation to ensure its product is moved but do not want to pay the nonoperational expenses. The container shipping lines are shifting asset risk to the shippers and vessel operators. By having a blend of company-owned vessels and chartered vessels, during low periods of cargo movement, the container lines have the option to not renew the charter agreement. Likewise, during peak cargo periods, container lines can pay up for chartered vessels because the shippers need to move product.
The model is very similar to the pushboat fleet on the Inland Mississippi River. Kirby Inland Marine owns the most pushboats in addition to operating a sizable number of chartered pushboats. During the Great Recession of 2009, Kirby Inland Marine delayed resigning pushboat contracts until the freight outlook improved. The “pushboat only” companies suffered dramatic losses, and many went out of business. During this recession, the chartering vessel companies were in the same situation until the recent increase in the container freight price. The charter vessels experienced a significant decline in revenue, but the chartering rates for most vessel sizes are now above rates charged at the beginning of the year.
Inactive Container Vessels (Units Idle, Breakdown by Size)
(source: BIMCO, Alphaliner)
When volumes and capacity come back into equilibrium, the container lines will push back on the chartered vessels, which will effectively reduce capacity and keep container freight rates from going back to $2,000 in the near term. The reality is with new larger vessel construction subsidized by governments, it is only a matter of time before container freight rates return to the sub $2,000 per TUE rate.
According to Alphaliner, owners ordered 98 container ships in 2020 with an aggregate capacity of one million (TEUs). Most of the Q4 2020 orders were “megamaxes,” ships with a capacity of over 18,000 TEUs and 23-24 container rows on deck. This was the highest quarter of orders since 2015. This month, and not included in the Alphaliner numbers, Ocean Network Express (ONE) announced that it has signed a letter of intent with Shoei Kisen Kaisha, a ship leasing business owned by Imabari Shipbuilding Co., for six ultra-large boxships planned for delivery in 2023 and 2024. The new ships will be built by a consortium of Imabari Shipbuilding Co. and Japan Marine United Corporation. They will operate under a 15-year charter to the network. Some of the new capacity will be offset by not renewing expiring chartering contracts. That being stated, adding 120,000 TEU is one order that will require ten 12,000 TEU vessels to be scrapped. With the new locks on the Panama Canal being able to handle 13,000 TEU vessels, it is unlikely the vessels will be removed from service.
If container freight rates remain low for a prolonged period, the chartering companies will buy each other’s fleet at discounted prices. Eventually, the chartering companies will own the least expensive fleet. For container lines, the temptation will be to buy the charter fleet at a discounted price. If the pitch is at a discounted price, the chance of freight rates reaching a level of unprofitability is highly improbable. Assuming new vessel construction is encouraged, it is difficult to see a path forward with prolonged high container rates.
Bulk Vessel Size Classifications
(source: IFT)
Grain and soybeans account for over a quarter of the volume transported in Panamax vessels. The China/U.S. trade war lowered grain and soybean volumes transported in Panamax vessels in 2019. Over half of the volume transported on a Panamax category is coal, which is declining domestically, but energy consumption is still increasing in Asia. The need for less pollution combined with available natural gas is reducing world coal consumption from its forecasted baseline. U.S. Energy Information Administration (EIA) has U.S. coal exports improving from 64 MST in 2020 to 67.5 MST in 2021, but in 2018 coal exports were 115.6 MST. With world environmental policies aimed at replacing coal consumption with renewable energy, the opportunities for increasing coal exports is limited.
Long-term, higher bulk ocean vessel freight rates will be difficult to maintain due to the economy of scale generated from the larger vessels. With China producing over half the world’s steel, the ability of Chinese ports to receive bulk vessels exceeding 200,000 MT allows larger Capesize vessels to be built, which reduces volume for the small Capesize vessels. With the deepening of ports around the world, small Capesize vessels can now service more grain facilities, which reduces the volume for Panamax vessels. In addition, with the completion of the deeper Mississippi River, Panamax vessels will load heavier, which reduces the need for Panamax vessels. With a deeper Columbia River and deeper Chinese ports, West Coast ports are loading more cargo on vessels. Of course, Panamax vessels will pull volume from Supramax.
In the short run, the bulk market is enjoying a surge of volume created by Phase One and pent-up demand. This combined with a very small order book for new bulk vessels should provide upward pressure on ocean grain freight rates. It is also reasonable to expect some container grain volume to switch over to the bulk market.
U.S. to Japan Grain Vessel Rates
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