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The back end of the container market forward curve collapses on back of dampened outlook for 2013

By • Dec 2nd, 2011 • Category: Containers

The Coracle Container market podcast for Dec 2, 2011 in association with GFI

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The announced PSS from the different carriers are as per below:
– CMA-CGM (Asia – Med trade lane) $150/teu on 15 Dec
– UASC $200/teu on 16 Dec
– Hapag-Lloyd $225/teu on 19 Dec
– Hanjin $200/teu on 23 Dec
– Maersk (Asia – Europe and Asia – Med) $200/teu on 26 Dec
– OOCL $200/teu on 26 Dec
– CSCL $225/teu on 28 Dec
– MSC $200/teu on 1 Jan 2012

Thank you for downloading the container market report from Coracle Online and GFI for December 2nd 2011. This report will look at the derivative and physical markets.

Starting with the Shanghai NW Europe paper market and the front end of the curve remained little changed this week as we saw continued interest in trading the spread between Q1 and Q2. A dampened outlook for 2013 saw a fall in the back end of the curve. Similarly, on the Shanghai – USWC route we saw the back end of the curve fall significantly in value. On the Chinese SSEFC platform, the prompt months rose this week as everyone expects a part of the RRI to come into force from the 1 Jan 2012.

For the physical market and the Asia Europe route, December looks geared to be an interesting month for the container shipping industry. Here are just a few key events that have happened in the past week –
* CMA CGM & MSC have announced a joint alliance whereby the two will be partnering on the Asia – Europe, South America and Asia – Southern Africa trade lanes.
* CMA-CGM will not be renewing their joint service with Maersk on the Asia – Europe trade lane and this is due to end sometime next year in February.
* APL received delivery of two 10,000 TEUs vessels which will be deployed on the Far East – Europe SCX Express loop, jointly operated by APL and MOL.
* CKYH announced a suspension of their NE4 service (the last sailing will be on the 8th Dec). This service is currently operating with seven ships of 8,200 and 9,000 TEU – This represents a withdrawal of 3.2% of capacity.

Despite the capacity withdrawal announced by CKYH, it has yet to have an impact on freight rates as they remain at rock bottom levels. With rates currently still at unsustainable levels and utilisation rates reported to be running at best at 75%, it makes us questions just how successful the PSS will be later on this month. Having asked a number of Chinese freight forwarders, many are booking freight with no PSS for the latter half of December and do not expect a PSS to be implemented.

We have outlined the announced PSS from the different carriers in the show notes on ShippingPodcasts.com

Given the spread of the implementation dates of the announced PSS it makes us wonder just when, if it does happen, will the surcharge be able to come into effect?

On the Transpacific route the double digit jump in retail sales during the Thanks Giving holiday season shouldn’t be seen as an early indicator to stronger retail sales this Christmas. Many retailers cited a significant fall in purchase orders and volumes out of China during the peak season earlier this year and Chinese based forwarders do not expect to see a significant surge in volumes this month. Whilst utilisation rates remain around the 80% level this week, freight rates remain largely unchanged as most are bracing for part of the RRI to come into effect at the start of next year.

At a time when everyone is scrutinising the current behaviour of the carriers, whether it be implementing a PSS or GRI or a reduction in capacity, we decided to take a different approach. Instead of looking at the present actions, we have a look at the impact of the past actions, i.e. over ordering, on the future supply situation. During the boom economic years of 2007 – 2008 a lot of ships got ordered as a result of very low interest rates, inflated future expectations and ship finance banks willing to finance over 80% of the value of a vessel without any true income guarantees in place. In the coming years we will suffer from this over ordering of vessels. According to Alphaliner, the current annual capacity on the routes Far East – Europe is in nominal capacity terms 19.6 million TEUs.

We expect that all newly delivered ships in excess of 9,000 teu will be employed on the route Far East – Europe. For 2012, Alphaliner expects 758,178 TEUs of these ships to be delivered. If we assume that each vessel will do 5 round voyages a year (a conservative estimate), the additional capacity added to the Far East – Europe trade lane will be 3.9 million TEUs. This is an annual capacity growth of 20% and something has to be done to bring the supply into balance with the hardly growing demand.

So what can be done?
* A percentage of idle capacity can grow, but we expect that it won’t have any impact on Asia – Europe as the biggest vessels tend not to be laid up.
* GRI / PSS / RRI will be announced to pay for the very poor utilisation rates, but we don’t expect shippers to pay for these extra costs. The conference system has been abolished for services to Europe and the last successful GRI implemented was in March 2010. Since March 2010, all GRI’s/ PSS /RRI announced have failed to materialise due to the severe overcapacity.
* 15% of the fleet on Asia – Europe is less than 6000 teu. We can imagine that these ships will be replaced by new build ships.

Even if all the vessels under 6,000 TEUs are cascaded, the net volume increase for 2012 will be 5% . Historically, such an increase would be seen as an acceptable level provided that demand growth is greater than supply growth. Given the current poor utilisation levels, demand has to grow by way in excess of the extra 5% supply. However, we fear this will not be the case.

You can call us whatever you want: bears / pessimists / realists, but we believe that as long as supply is growing faster than demand, it makes sense to sell container freight derivatives at a premium to today’s spot market. Especially for carriers that have new builds arriving in 2012, and which are expanding their capacity..

Thanks for listening