In the high jump ‘the scissors’ was one of a number of techniques eventually superseded by Dick Fosbury’s ‘Flop’, which saw the American athlete win the gold medal at the 1968 Olympics in Mexico City. The container shipping market has seen a bit of ‘flop’ of its own in recent years but today a return to the ‘scissors’ appears to be providing some helpful support at last…
It has been clear to market watchers that containership earnings have spent most of the period since the onset of the global financial crisis back in 2008 at bottom of the cycle levels. The Analysis in SIW 1,245 illustrated how cumulative earnings in the sector in that time proved a bit of a flop, and notably so in comparison to those in the tanker and bulker sectors. However, it’s fair to say that things have started to look a little bit better recently.
The first building block was that the freight market appeared to bottom out in the second half of last year, with improvements in box spot rates on a range of routes backed by careful management of active capacity. In the first quarter of 2017, the mainlane freight rate index averaged 64 points, up 42% on the 2016 average. However, containership charter rates remained in the doldrums into 2017, with the timecharter rate index stuck at a historically low 39 points at the end of February, before the market picked up sharply during March taking the index to 47 (though since then market moves have been largely sideways). This change in conditions was partly supported by liner companies moving quickly to charter to meet the requirements of new alliance service structures, but how much were fundamentals also driving things?
Well, the start of some upward movement at last was to some extent in line with expectations, with demand growth expected to outpace supply expansion this year, and no doubt accelerated charterer activity helped too. However, the market received additional impetus from recent sharp shifts in supply and demand.
Doing The Scissors
The lines on the graph (see description) show y-o-y growth in box trade and containership capacity; this is where the scissors come in. In 2015, capacity growth reached 8%, and remained ahead of trade growth until Q4 2016 when the lines crossed. In 2017, with capacity declining by 0.1% in Q1, backed by historically high demolition, and trade growth, notably in Asia, pushing along nicely, a big gap between the two lines has opened up. Demand is projected to outgrow supply this year (by c.4% to c.2%), but not by quite as much as seen so far. Full year expectations may be a little more restrained, but it’s still a helpful switch.
Going For Gold
So, in the case of the recent changes in containership earnings, maybe a bit of extra heat from the charterers’ side helped, but it looks like fast-moving fundamentals have offered some support too. Perhaps it all goes to show that old methods can sometimes be as good as new ones, and right now boxship investors should be happy to forget the ‘flop’ and focus on the return of the ‘scissors’.