Analysis
24/10/2013

Following Far East-Europe Freight Rate Fundamentals


The Far East–Europe mainlane sits at the top of the global route hierarchy. It is where most of the ultra-large containerships on the orderbook are designed to be deployed. As such the cascade process - the redeployment of relatively smaller tonnage down to other routes as larger ships are delivered - is crucial in determining running capacity which, in conjunction with trade volume growth, largely drives the level of the freight market.

Tracing the Pattern

The unprecedented 15% contraction in westbound Far East-Europe box trade volumes witnessed in 2009 led to a plunge in freight rates - carriers could not reduce capacity fast enough, as shown on the Graph of the Month. However, trade recovered more quickly than anticipated, leading to a rapid rate improvement, peaking at over $2,000/TEU according to the Shanghai Containerized Freight Index (SCFI).

Yet from mid-2010 operators continued to pile on capacity (or not cascade enough off to counterbalance the delivery schedule) while trade growth declined. This produced a long (2010-11) decline in freight rates. The sharp recovery in the rate in early 2012 was only made possible by a long spell of coherent capacity management by carriers. At last they were able to reduce running capacity in line with trade volumes.
Stuttering 2013

This year, a 64% fall in rates in 1H 2013 came as volumes remained slightly down y-o-y, while supply increased by an average of around 5% y-o-y. However, a short-lived summer rate recovery was aided by the return of positive trade volume growth on the route, while capacity growth was just about kept in check, slowing to 2% y-o-y. And yet, the recent steep decline in freight rates that followed (down to the average of $920/TEU in September shown on the graph and just $661/TEU by mid-October) strongly suggests that cascading has not since kept pace with the very heavy large ship delivery schedule.
The Never Ending Story?

It’s not hard to see why. 81% of the total containership capacity on order is accounted for by 8,000+ TEU vessels. Even if trade growth pick up, deployment of large ships inevitably needs to be spread onto a number of other routes, including the Transpacific and the larger North-South trades. The integration of 16-18,000 TEU vessels onto the Far East-Europe trade may provide momentum to the cascade process, as smaller VLCSs will struggle to compete on a cost per TEU basis.

In the medium-term, one view is that the Far East-Europe trade may become a self-contained micro-market, with only the very largest containerships deployed. Regardless, at the moment the Far East-Europe freight market remains under severe pressure, with operators struggling for profitability. Even five years after trade volumes collapsed, carriers still have to work very hard indeed to cascade enough capacity to offset substantial large boxship deliveries.
Source: Clarksons


Analysis

The level of forward orderbook cover is one indicator of the state of global shipbuilding. When times are tough, yards can find the race for the limited amount of cover available difficult, but when times are better forward cover can seem very supportive.

Evercore ISI analyst Jon Chappell has cut his already low rate projections for the dry bulk sector even further because of "hideous" market conditions. Chappell had noted in February that rates were below operating costs, creating an "unsustainable" situation. "Well, 10 weeks later, not only are rates still sub-operating costs, but some rates are even lower today, mainly in the Capesize trades," said Chappell in his latest sector outlook.

The Chinese economy grew by 7.0% y-o-y in the first quarter of 2015, according to National Bureau of Statistics in China. This is the weakest overall growth in six years. Growth during the quarter was strongest in the industrial sector (6.4%) and the service sector (7.9%), whereas the primary sector (3.2%) contributed to a lesser extent.
Since February, freight rates on the three key container shipping lanes has left the erratic up and down movements behind only to slide week after week, BIMCO reports.




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