As the world economy struggles to recover from the worst financial crisis since the Great Depression, the container freight market is bouncing back quickly from an initial slowdown. Combined effects of strong shipping demand, global shortage of containers, limited capacity of ships and port congestion underline the main drivers for the upswing of current sentiment.
Demand
Demand fundamentals started to turn positive during the second half of 2020 as container transportation picked up considerably, exceeding supply capacities. This boom was mainly caused by lockdowns, seeing a lot more people working from home and spending less on travel or services. In the United States, greater spending on personal protection equipment and home electronics because of the coronavirus caused containerised imports from Asia to jump by about 30% compared to the previous year, according to PIERS, the US trade reporting service compiled by IHS Markit. The sharp rise in export volumes from Asia and decline in shipments from the rest of the world has skewed global trade flows, causing bottlenecks at ports, supporting the upward market sentiment.
Supply
Increased demand, combined with port congestion associated with covid restrictions, had a direct impact on vessel supply. Port congestion, at the moment, is a big challenge for shippers. There is an emerging threat for more bottlenecks in the logistics supply chain and cargo flow from Asia to Europe or North America due to Malaysia’s potential lockdown amid a new wave of the pandemic. The Port of Yantian is partially closed because of a COVID-19 outbreak, and Hamburg is now badly afflicted by congestion.
In addition to the COVID-19 related ports congestion, when the Ever Given megaship blocked the traffic in the Suez Canal for almost a week in March, it also had a direct impact on vessel availability and therefore supply. Although the ports were able to clean up some of the backlogs during the calmer period when container ships were not able to arrive, many ships arrived at the port all at once in April, which led to longer waiting time, aggravating the market situation that was already under pressure. The graph belows shows the direct impact on vessel supply during the last couple of months compared to last year looking at the number of idle vessels.
Impact on Freight
Supply & Demand fundamentals had a direct impact on Freight rates. The Ningbo Container Freight Index, compiled by the Ningbo Shipping Exchange and promoted by the Baltic Exchange, reflects the fluctuation of freight rates of the international container shipping market by calculating and recording the changes of container freight rates of 21 routes departing from Ningbo-Zhoushan port, including composite index and 21 individual indices.
On 26 March 2021, the Freightos Baltic Index (FBX) stood at $2,174 per FEU, and by 7 May rates had increased 65% to $3,596 per FEU. Rate levels continue to surge with the FBX composite index going above the $5,000 level towards the end of May ending at a new high of $5,230/FEU. This is remarkably high compared to a pre-pandemic level below $1,400/FEU. A quick glance at the major trading lines, reveals the rebound is noticeable since the start of the pandemic. Asia - Mediterranean rates were the first to cross the $10,000/FEU mark by increasing 27% in May, and 44% since the start of the year. Asia - US East Coast rates climbed 18% to $7,328/FEU, and Asia - Europe prices increased 27%, closing the month at $9,871/FEU, more than six and a half times its level a year ago. With no easing in demand, Asia - US West Coast rates also increased, 11% for the month and 28% so far this year, to $5,379/FEU. The graph below shows the freight rates vs the idle ships on a weekly basis.
Looking at the graphs above, it seems that the world does not have enough containers in the right places to handle cargo demand. The global shortage of containers is crucial and it is estimated that will last until 2022. Some market participants are concerned that due to the inability to reposition containers to suitable areas, a large number of new containers will be stranded at the terminals and there will be further delays at the ports. Although the entire industry hopes that these logistics problems can be eased as soon as possible, at this moment it seems that these will at least last through the end of the third quarter.
Looking ahead, for shipping costs to return to pre-pandemic levels, global production will have to resume its normal patterns, with North America and Europe producing more of their own products and relying less on those made in Asia, especially China. Furthermore, the extreme shortage of ships’ supply and containers means there is absolutely no excess capacity to handle the typical disruptions seen in freight transportation, like a simple engine malfunction. Thus, market expectations provoke that the current boom of freight rates is here to stay in the coming months.
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