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Container market woes and a trading strategy… Oct 14 report

By • Oct 14th, 2011 • Category: Containers

The Coracle Container market podcast for Oct 14, 2011 in association with GFI

To learn more about the liner markets, why not take Coracle’s Liner Trades course? (Use promo code PODCAST and save 10%!)

This podcast is sponsored by FutureShip and Capital Link
See you at the CSR conference on 27 October

futureship

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Graph referred to in this episode:

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Thank you for downloading the container market report from Coracle Online and GFI for October 14th 2011. This report will look at the derivative and physical markets.

Before we start, we want you to know that Capital Link will be hosting a Shipping Forum on Corporate Social Responsibility in London on 27 October. The objective is to help raise awareness about the practice and benefits of CSR in the shipping and offshore industries. CSR is an increasingly important issue that shipping and offshore companies cannot afford to ignore. This event is sponsored by the maritime consultancy FutureShip, a subsidiary of  Germanischer Lloyd. For further information, contact Vicky Siabani via email vsiabani@capitallink.com, or by telephone at +30 210 610 9800, or visit forums.capitallink.com And if you are going, say hello to James Tweed from Coracle!

We start with the paper market and the Shanghai North West Europe route where the prompt months on the forward curve followed the index as it went lower this week. Surprisingly cal12 increased in value. Our advise to carriers would be, if you plan to expand the fleet next year and do not have sufficient cover in place, then make sure you use this upturn in rates to hedge next year’s freight income and for those who like a punt: the curve is in a steep contango, so it would be an idea to buy the prompt months and sell the back months. In terms of the Shanghai USWC route, the overall direction is still down and the increased value for Cal13 doesn’t look justified.

Looking at the physical market and unlike the UK X-Factor boy-band, One Direction, the main difference between the container industry and this debut winning band is that there appears to be no X-Factor within the industry. Mired by conservative views and lagged reactions, the industry has itself created and brewed the perfect storm, which is now finds itself stuck in. During the two day Container Conference in Shenzhen this week, there was not a single mention of a rate hike in the near term on the two main trade lanes: Asia-Europe and the Transpacific. What’s even more worrying is that there didn’t seem to be any near term plans to lay up vessels or suspend services on the Asia-Europe trade lane, where rates have already tumbled by 49.5% in the year to date.

Looking at the Asia – Europe route and a major carrier said this week that there should be only vessels in excess of 10,000 teus operating on the Asia – Europe trade lane, as ‘size is of importance’. So it seems likely that it will be a case of ‘survival of the fittest’ on this lane. Industry contacts are saying that on some named accounts, rates are as low as $500/teu, which doesn’t even cover the variable costs, let alone the fixed costs for the carriers. What’s interesting to note is that over the past 10 years, slot costs have increased by 90% whilst vessel size has multiplied by 1.7 times. Despite carriers reasoning that ordering ultralarge container carriers will help achieve economies of scale, this can only be attained if utilisation rates are high and there is sufficient trade volume to fill these vessels. Utilisation levels for the next two weeks until the end of October look promising as manufacturing plants have started up again post the Golden Week holidays, but the outlook and purchase orders until the end of the year remain malign, and not just for the Eurozone but the US as well. Most shippers see falling retail volumes globally, even in emerging economies like Latin and South America, where some have seen sales fall off a cliff in the past few months.

On the Transpacific trade lane, despite the service suspensions, rates still remain at very low levels with some named accounts being able to achieve bargain rates of $1250/feu. People are looking for the winter deployment programs announced by carriers and starting earlier in late October this year to act as a buffer to help rates recover, but many are sceptical as to whether this can be achieved. Most are banking on the outlook post Q1 of 2012 as to what rates will do. If carriers make no capacity adjustments, many believe we will see rates falling to similar levels as witnessed in 2009. If carriers do take action, then we could see the market turn much faster than it has fallen.

A number of shippers have negotiated index-linked contracts for the next year given the uncertainty in rates over the coming year. It is important to bear in mind that index linked contracts follow the spot market – both up and down. If you want to be able to budget for fixed rates whilst using index linked contracts, then make sure that you have derivatives in place to fix your freight rate in the paper market.

Now some general market comments … Nobody rings the bell at the bottom of the market, making it very tough to know when it is the right time to step in. Supply side figures are pretty transparent, but there tends to be a time lag from when demand side figures are published. More to the point, as we stressed in our report last week on behavourial economics, quite often it is not even supply and demand driving the markets, but human behaviour. In the end it is humans who are negotiating freight rates on the spot / physical / derivative markets. One of our clients made a good point this week. In the retail industry, it is the consumers who are adding to the recessionary environment, by actively bending down to the bottom shelves in the supermarket to go for the cheapest products. When recessions are over, consumers don’t worry so much about prices and simply fill their trolley. It is too early to say that downward pressure is easing in the container market, but it feels like the downside is smaller than the upside. Our gut feeling is telling us that most shippers can live with the current freight rates. Meanwhile we are coming to a point that carriers can no longer live with the rates. The current freight rate of $697 for the route to NW Europe doesn’t even cover the Maersk BAF on the same route. This month the BAF is $790, given a bunker rate of $642 / ton. If we deduct the BAF from the spot market rate of $697, we start with a loss of $93 (that’s before any other expense has been paid for). Not being able to pay for the bunkers and still moving containers is a strategy that won’t last for a long time.

We have added a chart to the show notes on ShippingPodcasts.com that show something unique: we are in uncharted territories. One thing is certain, such a situation can’t last for a long period of time. Something has to give and it is most likely to be defaults of liner companies in combination with capacity adjustments i.e. laying up of vessels or scrapping vessels…

For a trading strategy we would like to focus on the Q1 SCFI NW Europe, which is offered at $875/teu. We think this is an attractive rate to buy, maybe in combination of selling the bunker component (call the GFI bunker swap desk to talk it through!). Given the current bunker rates, you can but freight (excl. BAF) at $85. This is historically a very low rate. Buying makes sense provided you believe that the current rates are unsustainable, and that freight rates can easily pick up in the next 3 months. Normally we would say, don’t catch a falling knife and build up a long position once the trend has reversed. However in this “new” market you might not be able to procure all the freight at exactly the bottom, and these offers below marginal cost look attractive. Liner companies are bleeding money, and from a book makers perspective we would say: “the odds for buying at current rates look better than for selling”

Good luck and thanks for listening