Global News Weakening ocean market not yet in shippers’ favor: analysts

Global ocean freight volumes for the full year are expected to be flat or even decline as economic conditions deteriorate, and the bottlenecks at ports in the US and Europe will ease with rates continuing to fall through the second half, according to carriers and analysts.

But with congestion levels still high in the US and Europe, the container shipping markets on the main trades out of Asia have not weakened enough for the rate negotiating balance of power to shift from carriers back to shippers.

“The market is gradually changing, and carriers no longer hold all the aces,” Peter Sand, chief analyst at rate benchmarking platform Xeneta, told JOC.com this week. “I expect rates to decline going forward as some of the roadblocks are cleared, but I still see many hurdles that prevent a sharp fall, let alone a swift shift in negotiations power.”

The largest of those hurdles were COVID-19 obstacles in China and congestion in European and US ports that would limit the ability of shippers to reduce contract rates, Sand said. “Carriers will push for longer duration of contracts as a part of a renegotiation if the shippers ask for a lower rate,” he said.

Shipping executives pointed to rapidly deteriorating global economic conditions, ongoing disruption to container supply chains in key destination markets, and the lingering uncertainty around China’s pandemic-combating measures as threats to the normalization of the markets.

Patrick Jany, CFO of A.P. Møller-Maersk, told analysts in a second-quarter earnings call Wednesday that geopolitical events and rising inflation were casting a darkening shadow over global demand.

“There has been erosion of the rates, but we cannot escape the macroeconomic environment with slower growth, higher inflation, [and] lower consumer spending, so when you look at those indicators there is no doubt where demand is going,” Jany said.

Maersk expects global volumes to be at best flat this year but will more likely decline slightly compared with 2021. However, when it comes to the two main trades out of Asia, there is a very different demand picture.

Total US imports from Asia for January through June are up 6 percent year over year at over 10 million TEU, with the 1.68 million TEU imported in June the busiest ever on the eastbound trans-Pacific, according to PIERS, a sister product of JOC.com within S&P Global. By contrast, January through May European imports from Asia have fallen 6 percent to 4.8 million TEU, according to Container Trades Statistics, and there are no signs of volume picking up through what should be Europe’s peak season. Europe economic woes deepen The European manufacturing sector fell deeper into contraction at the start of the third quarter, with S&P Global Eurozone PMI data signaling the sharpest decline in production since the initial wave of strict COVID-19 lockdowns in May 2020.br>

“Eurozone manufacturing is sinking into an increasingly steep downturn, adding to the region’s recession risks,” was the grim analysis of the PMI survey data by Chris Williamson, chief business economist at S&P Global Market Intelligence.br>

“New orders are already falling at a pace which, excluding pandemic lockdown months, is the sharpest since the debt crisis in 2012, with worse likely to come,” he added. “Production is falling at especially worrying rates in Germany, Italy, and France, but is also now in decline in all other surveyed countries except the Netherlands, and even here the rate of growth has slowed sharply.”br>

Niels Rasmussen, chief shipping analyst at BIMCO, said in a market update this week that retail spending in Europe was down, consumer confidence in the European Union was at a record low in July, and inventories at a record high.br>

“Indicators appear to point towards a further weakening of global container exports to Europe in the coming months,” Rasmussen said, adding that the key driver of freight and charter rates remains congestion, which he believes is unlikely to improve significantly even if exports to Europe fall even more.

Olivier Ghesquiere, president and CEO of container leasing company Textainer, shared the view that congestion will continue to undermine the container shipping market’s return to normal, but said China’s pandemic-combating measures could be central to that normalization.

“We see the probability of congestion increasing suddenly again if there are unexpected events like another situation in China where some of the ports have to lockdown due to COVID, or some major storms that [are] delaying some ships,” Ghesquiere said in an interim earnings call with analysts this week.

“All of that could still play a big role, and in our view, it means that the congestion is unlikely to go away very soon,” he added.

Ghesquiere explained that congestion was a supply problem, and even if demand slows, the constraints in inland logistics in the US and Europe would keep supply under pressure.

“We continue to see a shortage of truck drivers, a shortage of workers in the various warehouses, tension with railway operations, and so on,” he said. “Those problems are not only limited to the US, but they are also worldwide and that is really the main reason why we continue to see congestion remaining in place and only easing very, very slowly.” Rate decline delayed Investment bank Jefferies noted in a research note this week that executives at Japanese carriers NYK and “K” Line believe supply bottlenecks in key markets have served to delay an inevitable rate decline “by a few months.”

“We expect a sharper decline in container freight rates into year-end,” Jefferies wrote in a bearish report. “Trans-Pacific spot freight rates have fallen below contract prices, but contract prices have yet to be adjusted lower, which could happen before the end of this year.”

Spot rates on the Asia-US West Coast trade have fallen 23 percent since Jan. 1 to $6,386/FEU, but the long-term contract rates are up 41 percent through the same period at $7,303/FEU, according to rate benchmarking platform Xeneta. Despite recent declines, spot rates are still up 54 percent year over year, while contract rates are almost five times higher.

On the Asia-North Europe trade, spot rates are still above contract levels, but have fallen almost 30 percent since Jan. 1 to $10,311/FEU. Contract rates have remained flat through the year and are currently at $8,883/FEU. However, both rate metrics remain more than five times higher year over year.

Lars Jensen, CEO and founder of Vespucci Maritime, wrote in a LinkedIn post this week that compared with normal seasonality, rates on Drewry’s World Container Index since Chinese New Year in February are currently down 22 percent on Asia-North Europe and 26 percent lower on the Asia-US West Coast trade.

“The rates are of course still extremely high by historical standards, but what this slide below seasonality tells us is that the market strength now is much reduced compared to the beginning of 2022,” wrote Jensen, also a JOC analyst. “It also tells us that the pace of decline is quite modest and a full reversal back to some semblance of normality at this pace will not be accomplished until quite a bit into 2023.”

While shippers celebrate the decline in rate levels, the ongoing poor schedule reliability continues to heavily disrupt supply chains. It was an issue highlighted by shippers recently, especially those on the Asia-Europe trade, who told JOC.com that although it was becoming easier to get space for their weekly volume and at the time required, ongoing poor on-time performance by the carriers was frustrating.

“The schedule reliability of the carriers is bad,” the logistics director at a global shipper said. “We are closely monitoring how carriers are performing and are trying to set our production plans according to the schedules, but it is a huge problem.”

Global schedule reliability dropped to 36.9 percent in the second quarter from 39.1 percent in Q2 2021, according to Sea-Intelligence Maritime Analysis. The analyst added that it was the lowest recorded on-time performance since the index was created in 2014, and “a staggering drop” from pre-2020 levels that were above 75 percent.

On the Asia-North Europe trade lane, second-quarter schedule reliability of 27 percent was up 5 percentage points year over year, but far off the above-80 percent on-time performance of the previous few years.