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Container report Dec 16

By • Dec 19th, 2011 • Category: Containers

The Coracle Container market podcast for Dec 16, 2011 in association with GFI

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Thank you for downloading the container market report from Coracle Online and GFI for December 16th 2011. This report will look at the derivative and physical markets.

We start with the paper market and the Shanghai – NW Europe route where both the prompt and front months fell in value this week as market participants became increasingly sceptical of a dramatic turnaround in rate over the next few months. There is still continued interest in trading the spreads with Q2/Q1 being bid at $120 and Q3/Q1 bid at $150. It is interesting to point out that assuming capacity remains around current levels or increases in Q2, the period Q2 is trading at a 66% premium to the spot market. Given the uncertainly over the first half of 2012, it could be an attractive level for carriers to start hedging part of their exposure for that period.

On the Shanghai – USWC route the prompt months saw a marginal decline in value this week. What is worth noting is that there was a significant drop on the SSEFC for the months Jan – Apr as the market grew less confident of a RRI being implemented on the 1 January 2011.

In terms of the physical market and the Asia – Europe route and like the popular dance, the limbo, there is only so far you can bend over backwards before you fall over. Similarly, freight rates on the Asia – Europe trade lane appear to be testing the ‘bottom’ horizontal line and despite the marginal rise in rates this week on the SCFI, it could well be a dead cat’s bounce. With vessels running at best on 80% utilization levels and carriers still shopping around for cargo, it looks increasingly certain that 2011 will be a year whereby carriers have failed to push through a rate increase/surcharge. Industry sources cited that UASC had failed to implement their PSS, which was previously announced to be effective from Dec 16, and will be following in the footsteps of Maersk who are opting to implement a GRI instead on the 15 Jan. Furthermore, a shipper informed us recently that when they asked for a freight quote to ship only a handful of boxes, a carrier had aggressively undercut the rate that was being offered by their competitors, which was below $475/teu. Times are tough, one forwarder mentioned, and at the end of the day, volumes are king to the carriers. The question is how far can the carriers bend over backwards before they fall over? Carriers have not been able to successfully implement a surcharge since March 2010. The last time rates increased on the SCFI was over the 5 weeks from the end of July to August during what was meant to be a ‘peak season’. That failed to occur and carriers only managed to get an aggregate increase of $40/teu over the 5 weeks, which was quickly
wiped out in the following 3 weeks during the start of September when volumes failed to live up to expectations.

On the transpacific route and despite early efforts by the TSA to announce a Rate Recovery Initiative of $400/feu effective from the 1 Jan, there is growing skepticism as to whether or not this could even go through. There is seasonally a spike in volumes being moved on the Transpacific trade lane prior to Chinese New Year, but most are seeing none of that right now.

We all know that the liner industry is suffering from a hangover of overcapacity and weakening global demand, especially from the two largest seaborne tradelanes: Asia – Europe and the Transpacific. Plain common sense would suggest that despite this, a business would try to focus on maintaining profitability and its margins, not eroding it. Despite rates at unsustainable levels in the current environment, carriers are still very much focused on chasing volumes. It is almost like a vicious cycle of fear and greed. There is greed to report higher volumes and fill more capacity, because they fear losing their market share. A few PMI data points released this week suggest that the global economy is still in a contractionary state. Whilst China’s PMI rose to 49 in December from 47.7 in November, it still denotes a contraction in the Chinese economy. Likewise, the Eurozone PMI came in at 46.9 in December from 46.4 in November. Let’s now have a look at the relationship between China’s PMI and the CCFI. If you were to look at a chart, you would see that the Chinese PMI is a leading indicator for the CCFI. With the Chinese PMI continuing its downward trend with additional downside risks from exports (especially to Europe and the US), even if freight rates remain at current levels, carriers will continue to erode their profit margins and book more losses. Risk management tools are available to everyone in the industry, whether it be index-linked contracts or container derivatives. A closer look into the tools available would allow not only carriers, but shippers and freight forwarders to
better manage their freight rate risks as there is the possibility that things can still get worse before they get better.

Thanks for listening