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Rates still dropping… Container market report Sept 30

By • Sep 30th, 2011 • Category: Containers

The Coracle Container market podcast for Sept 30, 2011 in association with GFI

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Thank you for downloading the container market report from Coracle Online and GFI for September 30th 2011. This report will look at the derivative and physical markets.

We’ll start with the Shanghai to NW Europe route and in line with our expectations, the derivative curve is coming off. On average the forward curve lost $45 this week, which is more than twice the fall in the index (the index was down 20 this week)
We hope that the liner companies have sufficient cover in place to come through the winter period. We would like to stress that “Unlike physical service contracts that are many times not worth the paper it is written on, so far all cleared container freight derivatives have performed”

On the Shanghai – USWC, the forward curve lost on average $41/feu this week, but is still trading at a significant value to the spot index. It is worth pointing out that the index for the USWC is relatively overvalued at the moment. Since the inception of the SCFI, the USWC has been on average priced at a 42% premium to the SCFI NW Europe. However, the SCFI USWC is currently 2.1 times or 110% higher than the SCFI NW Europe. The index is at 1556, whereas history would have expected the index to be at only $1041 (a 42% premium to Europe). In that respect, selling the forward curve for the USWC still makes sense.

For those who have seen the UK’s TV show ‘The Only Way is Essex’ you will know the theme song of the show: ‘The only way is UP’. Unlike the economic environment in Essex, which seems to be sheltered from the realities of the faltering global economy, the slogan in the container industry is quite the opposite: ‘The only way is down’. Not even all the fake spray tan in the world will help cover the pale prospects of the industry. Despite the continuous fall in rates, many believe that the current all-year low rates are unsustainable, however no-one really believes that rates will actually improve much over the new few months. Carriers are still chasing for cargo, and utilisation rates on the Asia – Europe trade lane is reported to be running at 75%, much lower than the 85-90% reported by some of the carriers. In the past few weeks, leading up to the week long Chinese holiday next week – Golden Week, there were no signs of a rush to have cargo moved. Volumes post Golden Week don’t look promising either: at least not for the carriers who have been trying since March of last year to implement a surcharge. Desperate times call for desperate measure… Our sources are citing that named accounts can procure freight for the rest of the year for as low as $550/teu whilst in the spot market, shippers can fix their cargo for rates as low as $650/teu. There is also further downside pressure over the coming months as BAF is expected to fall given the fall in bunker rates in the past few months.

It’s a very similar story on the USWC route. Despite more service suspensions on this route, supply and demand remain
heavily out of balance as volumes are expected to be much weaker than anticipated.

Robert Joynson of Macquarie Research was kind enough to send us his latest Global Trade Tracker. He pointed out as to having some cautious optimism on Asia – Europe. “Despite the benign volume outlook, our analysis suggests a combination of cascading and extra slow steaming could help to stabalise headhaul utilisation rates at close to the current level, while liner consolidation could help to ease pricing pressures.” In the long term, we agree and expect to see a stabalisation of freight rates around the current levels. Over the long run, container freight, like any other commodity, tends to be priced at the average production cost of the commodity. As we mentioned previously, the larger ships being introduced on the various trade lanes should drive future freight rates on average lower. The freight rates seen in today’s market are probably manageable in the long term. Some liner companies make a profit, some a loss, but on average liner companies can live with the current rates, provided they work with big efficient ships.

The brokers at ACM/GFI are pretty bearish on the short term outlook of the container industry for the following reasons:
Rates are still falling and as freight is trend sensitive they could well fall further.
The debt crisis is far from resolved.
Supply is growing faster than the shrinking demand.
There is a rate war going on, with the big boys trying to scare the small kids of their school yard.

A good storm is healthy to get the dead wood out of the forest, and as long as we don’t see dead wood falling out of the container industry, things should get worse before they get better. Big trees with a weak foundation (too much and too expensive debt) could fall. Small trees could prove to be more flexible. And any opening that will appear will enable the survivors to fit in. The storm that comes this winter will be, on overall, healthy for the industry.

During the last year, we have advised liner companies to take their risk management seriously and use freight derivatives whenever necessary to cover their risk. If you look at the chart in the show notes, you can see that utilisation levels are supposed to decline in Q4 (and sometimes Q1). In other words, it will get worse before it gets better. However this also creates opportunities and if you believe that things get worse, but also get better, then selling Q4 and Q1 and buying Q2 and Q3 makes a lot of sense…

Thanks for listening