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Our weekly review of the container markets. June 22

By • Jun 25th, 2012 • Category: Containers

** Due to audio problems, there is no recorded podcast this week, but you can read about the markets below:

June 25th is Day of the Seafarer. We hope that you enjoy the quiz found at http://seafarersweek.coraclequiz.com

Thank you for downloading the container market report from Coracle Online and GFI for June 22nd 2012. This report will look at the derivative and physical markets.
We start with comments on the paper market and the Shanghai – NW Europe route and the interest last week in the Q3 was reflected in the stronger outlook on the curve this week whilst Q4 remains largely unchanged. This suggests that the market anticipates the July GRI to have some impact, before the rates drop away in line with demand towards the end of the year. On the Shanghai to USWC route the front months of the curve continued to show further increases this week, although the rate of increase appeared to be slowing as the dust settles on the PSS. Q4 shows that further hardening in the rate is expected later in the year, with an increase of $80, and this sentiment looks to continue in to Q1 of next year as illustrated by a $53 rise.

Looking at the physical market and the Asia Europe route and another week in to June and we’re seeing mixed opinions as to whether the proposed 1st July GRI will be a success, or whether it will go the same way as the ill-fated June PSS. As we record this podcast we are aware of 11 carriers having announced GRIs for July to replace the previously aborted PSS levels. It’s worth noticing that NYK opted for a 1st July PSS of $250/TEU followed by a GRI at the same level effective the 16th. MOL also announced a PSS of $250/TEU although no decision has been made on a GRI yet. It also became apparent this week that Maersk Line had stuck by their 15th June PSS of $350/TEU. One wonders whether we’ll see a further GRI announcement from them…. time will tell. The remaining carriers have yet to show their hand, however if there were any lessons to be learnt from the collective failure to increase revenue in May and June, its to increase at the same time and at the same level. At this stage, given the capacity situation and the sluggish start to the Peak Season volumes, a $500/TEU rate increase may seem unrealistic, however if the carriers can tighten up on their announced levels and dates of implementation, one could argue that they may have a chance.

On the transpacific route the brokers at GFI enjoyed seeing so many clients at the CFDA Conference in New York this week. Attendees from many different spheres of shipping came together to share what proved to be an entertaining and informative day. The day focussed largely on index-linked contracts, with sessions on the different benchmarks available, the benefits of index linking, how such contracts can be made watertight, and how to use these contracts to hedge against freight rate risk. One attendee remarked, “Being part of the CDFA conference has been an eye opener. With the recent volatility in the container industry there is a need for our clients to hedge against their possible freight exposure. We believe that derivative trading will become an industry norm as the CDFA initiatives mobilize.”

In general market comments we expect that most listeners will have heard the famous quote from the film, Forrest Gump: ‘Life is like a box of chocolates. You never know what you’re going to get’. The irony in that statement is that when you buy a box of chocolates, you know exactly what the flavours and varieties are going to be. The different flavours will be a determinant of your purchase. Well, the same goes for procuring space with ocean liners. You know which ones are your favourites, you know which ones cost the most, and you know which ones leave a bitter aftertaste when your cargo gets rolled.

So here’s another memorable quote: ‘Stupid is as stupid does’. The same could be said of shippers not honouring their volume commitments made against long term freight rates offered by the carriers. In the short term, when space is abundant and rates are low, there are savings to be made by switching cargo to a cheaper service provider. In the long run however this damages shipper-carrier relationships, and when space gets tight again it may well be that life becomes a lot harder for the rate-savvy customer. As the container shipping market looks for ways to reduce the volatility in today’s market, focus must remain on shipper-carrier relationships. In times when market rate levels fall, and space availability is high, it’s natural for shippers to take notice of the cheaper rates available in the market. Likewise, when rates are high, carriers may be tempted to look at prioritising higher paying cargo.

By agreeing index linked contracts, both parties are free to enjoy market rates when they move in their favour. When the market moves the other way, both parties have the option of hedging their rates against damaging freight rate levels. They can do this completely separately from their physical cargo agreements with each other, meaning that ongoing long term contracts can be comfortably honoured by both parties. Because derivative agreements are completely separate from physical shipping contracts, index linking nurtures the relationship between supplier and customer, at the same time as allowing them to protect themselves against rate fluctuation.