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As liner companies order vessels like there’s no tomorrow, we consider some supply/demand basics

By • Sep 11th, 2011 • Category: Containers

The Coracle Container market podcast for Sept 9, 2011 in association with GFI

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Thank you for downloading the container market report from Coracle Online and GFI for September 10th 2011. This report will look at the derivative and physical markets.

We start by looking at the paper market and the Shangahi North West Europe route and this week the paper market lost a bit of value in the prompt months, but it is still trading at a significant premium to both the SCFI spot index and the levels traded on the SSEFC. Given the current economic outlook we believe that the 30% value premium of the Cal’12 over the spot index is too high. Especially given that we are in the middle of the peak shipping season. In terms of the Shanghai US West Coast route, Cal’12 is trading at just a 13% premium over the spot index. This is probably the result of the slightly inflated spot rates on the route to the USWC. The spot index will most likely come off further in the coming week. From that perspective, it might make sense to sell the prompt months.

Now our market comments and so far the main liner companies have been ordering vessels like there is no tomorrow. The hiccup seen in the year 2009 was deemed to be a one off event, and their attitude to risk represents the mentality last seen in the year 1912. The perceived unsinkable liner vessel named “Titanic” carried only 16 wooden life boats and four collapsible, folding lifeboats: the bare minimum required by the board of trade. The total carrying capacity of the Titanic was 3,600 passengers and crew, while the lifeboats had space for only 1,178 people. After all why manage risk, the Titanic was already unsinkable….. A hundred years later and not much has improved in the liner company’s attitude to risk. In line with the idea that the Titanic is unsinkable, the current story is demand can only grow. Adjusting risk management tools (substitute the amount of life boats, with the use of freight derivatives) in line with the risk faced is considered a dangerous proposition. Financial upside for the liner company is considered more important than the risk for passengers / investors. Well, let’s cross our fingers that we won’t see another liner company going down 100 years after the terrible disaster of the Titanic. In the physical market we are seeing a rapid decline in rates. Within a period of three weeks one of the Asian carriers has reduced their rate from Asia – Europe from $850 to $750. Our friends based in the Kwai Chung Container terminal in Hong Kong and Shanghai Container Terminals are all pointing out that ships are not running at full capacity despite the fact that we are currently in a peak season. Additionally, September is normally the peak season for air freight volumes this year, and there was no apparent peak in air freight. It is all doom and gloom, but hopefully it is not too late to invest in safety measures.

We’d like to look at the current trend for the Supply and the Demand in the container industry.

Firstly, supply:
– At the end of the second quarter the total fleet capacity of over 3,000 Teu vessels was 10.5 million teu.
– During the second half of 2011 this segment is forecasted to grow by 601,000 teu or up 5.7%. On an annualised basis that is 11.4% growth.
– During the year 2012 this segment is forecasted to grow by 1,443.5 thousand teu , or 13.7%
These statistics come from Clarksons Research

Now some demand numbers:
– Year on year demand statistics as published by CTS are in a declining trend
– Global leading indicators are in a declining trend
– US major appliance sales are in a declining trend, and YoY sales growth is negative
– The Port of Long Beach container volumes shows YoY growth figures are declining
– The ATA truck tonnage index is showing a declining growth.
– Russian retail growth figures YoY are stable around the 5.5% level
– Polish retail growth is positive but declining
– US jobless claims unexpectedly rose this week
– The ECB is holding interest rates, and warns of downside risk to Eurozone growth.

It is hard to quantify future demand growth, but from the looks of it, supply will outstrip demand in the next 18 months. This is the case for the segment of the container fleet that is used for the trading container derivatives. From that point of view, the huge premium over spot priced in the freight derivatives forward curve does not look justified. For those that are long freight, it should make sense to hedge some exposure at a premium over the spot, especially since future bunkers can be bought at a discount to the spot…

Thanks for listening