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Container market remains grim so we look at behavioural economics… Oct 7

By • Oct 9th, 2011 • Category: Containers

The Coracle Container market podcast for Oct 7, 2011 in association with GFI

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Thank you for downloading the container market report from Coracle Online and GFI for October 7th 2011. This report will look at the derivative and physical markets.

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WE start with the paper market and the Shanghai NW Europe route where the forward curve has lost on average $15/teu this week, reflecting the bearish views on the outlook for rates in the prompt months. Given the all time lows on the forward curve this year, many expect that rates will be unsustainable and current levels appear to be good value. As such, we saw some interests in the market, especially in Q1 2012, with bids of $800/teu and offers of $875. For the Shanghai USWC route, the forward curve shed an average of $34/feu as more negativity on a rate recovery was priced in; despite recent service suspension announcements.

Looking at the physical market and in a period which is seasonally meant to see higher volumes and higher rates in the form of surcharges, many have seen the opposite. Volumes are weaker than expected, surcharges have failed to be implemented, bunker costs are decreasing and general utilisation rates are low. Rates are still falling for both the Asia Europe and Transpacific trade lanes. On the Transpacific tradelane, there have been 11 blank sailings announced for Week 40 and we will not see volumes start picking up for another 2 weeks after the Chinese holidays. If volumes are still weak, then rates will plunge further south despite the service suspensions… Things are looking even grimmer on the Asia Europe tradelane as the rate war continues to erode carriers’ margins. With Europe heading into a recession and the idling and suspension of vessels and services more difficult given the vessel sizes deployed on this trade lane, a rate recovery in the near term seems less likely. The darkest hour is just before dawn and we believe the markets will turn, but it is a question of when.

In our market comments, we tend to focus on the market fundamentals of supply and demand. However, in the short term, there can be a huge imbalance in Supply and Demand and one of the drawbacks of fundamental analysis is that the decisions in the container world are not made by machines. Behavioural economics is the field that researches the odd ways in which humans make their decisions and can explain some of the decisions made in today’s market.

We thought we would present some theories of behavioural economics, sourced from Wikipedia.

GAMBLERS FALLACY: For example, if a fair coin is tossed repeatedly and tails comes up a larger number of times than is expected, a gambler may incorrectly believe that this means that heads is more likely in future tosses. Or, if a slot machine does not “jackpot” over a long period, a gambler may incorrectly believe that it is due for a win. This is similar to what we currently see in the container industry. Liner companies keep ordering bigger ships, and increasing their stakes , waiting for a change in odds and a rising market.

STATUS QUO BIAS: The status quo bias is a cognitive bias for the status quo; in other words, people tend not to change an established behaviour unless the incentive to change is compelling. Shippers prefer fixing spot and defaulting on service contracts, unless the market is clearly going up.

SELF SERVING BIAS: A self-serving bias occurs when people attribute their successes to internal or personal factors but attribute their failures to situational factors beyond their control. The self-serving bias can be seen in the common human tendency to take credit for success but to deny responsibility for failure. It is remarkable that none of the liner company CEO’s admit to being wrong for discrediting container derivatives during 2010.

FRAMING: A frame in social theory consists of a schema of interpretation — that is, a collection of anecdotes and stereotypes—that individuals rely on to understand and respond to events. Up until 2009, demand had grown at an annualised rate of 10% from 1998 – 2008. A contraction in demand in 2009 was unforeseeable and with the world heading into another recession, it seems like there are still a lot of people struggling to accept a decline in demand growth.

ANCHORING: During normal decision-making, anchoring occurs when individuals overly rely on a specific piece of information to govern their thought-process. Once the anchor is set, there is a bias toward adjusting or interpreting other information to reflect the “anchored” information. Plenty of analysts are still working with GDP multipliers to forecast freight demand, even though European companies are no longer outsourcing production. For example, Philips is bringing its electric razor manufacturing back from China to Holland.

GREED AND FEAR: Greed and fear are supposed, together with herd instinct, to be the three main emotional motivators of stock markets and business behaviour, and one of the cause of bull markets, bear markets and business cycles. Decision makers are greedy, and don’t want to hedge. They fear they will lose money on their hedge.

HERD BEHAVIOUR: Herd behaviour describes how individuals in a group can act together without planned direction. The term pertains to the behaviour of animals in herds, flocks and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations, sporting events, religious gatherings, episodes of mob violence and everyday decision-making, judgment and opinion-forming. Container industry participants have a huge sense for herd behaviour. We’d rather be all right, but if we are wrong, at
least I can hide behind the whole industry being wrong. A good example of this is seen in the ordering of bigger ships when demand is shrinking.

OK… we might have given something of an overflow of insights into behavioural economics but the best thing to remember is to be aware of the impacts on the industry and on your own decision making. It is important not to be to certain about your assessment of the markets. It’s better to hedge a percentage through derivatives, as the chance of being fully right is less than you think!

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