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An update on the Container markets from Coracle and GFI (Oct 8)

By • Oct 9th, 2012 • Category: Containers

The Coracle Container market podcast for Oct 8, 2012 in association with GFI

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Thank you for downloading the container market report from Coracle Online and GFI for October 8th 2012. This report will look at the derivative and physical markets.

We’ll start with a quick look at the paper markets and the Shanghai to NW Europe route where we’ve seen renewed interest in November & December contracts as a result of the pending GRI, leading to a rise in value for both months. Most notable is the increase in value of December at plus 31%, as market participants begin to consider the potential longevity of any imminent increase.
On the Shanghai to USWC route there are no updated figures from the SCFI due to the Chinese national holidays and therefore relatively little
change in the value of the curve. As with Asia-Europe, the most notable change is in December which has risen by 4% as the end of the year comes in to sharper focus.

On the physical market and the Asia-Europe route, news over the past week was thin on the ground, partly due to the ‘Golden Week’ public holiday in China. This brief period of respite will come as little comfort to carriers however as reports seem to point towards continued downward pressure on the freight rates. The general feeling from carriers is that the November GRI couldn’t come soon enough. Since last week all carriers have announced a GRI effective 1st November, however there’s still no news on further capacity withdrawals, and with just under four weeks left before implementation a question mark remains over how much, if any of the announced GRI levels will go through.

On the transpacific route there was more good news from the USA on Friday as the Department for Labour reported that unemployment in September fell to 7.8% from 8.1% in August, and is down to its lowest level since January 2009. This follows on the back of news last month that home sales have hit a two year high. Whilst many are still reluctant to count their chickens, it looks like the cautious recovery in the US is gathering
momentum. Utilisation levels remain relatively high for the carriers and shippers are still anticipating an increase in consumer spending towards the end of the year

Now for more general comments. In the 1994 film ‘Shallow Grave’ there is some dialogue which goes:
David: “You paid £500 for this?”
Juliet: “That’s what it cost, David.”
David: “No, no. That’s what you paid for it. £500 is what you paid for it. We don’t know how much it cost us yet.”

This conversation highlights the difference between the perceived price of something and its actual cost, especially in the long term. The point being that something’s value isn’t entirely dictated by its price, a concept we often see often in the freight market. Take for example the freight rates on the back-haul leg from Europe to Asia – rates are priced much lower than on the Westbound leg and when examined on their own merit (i.e. not as a part of the round trip) they don’t recover the whole cost of the physical movement. That said there is a hidden value in carrying the cargo (albeit at a loss) as Lines must reposition containers back to Asia in order to re-load cargo on the more profitable head-haul leg. Therefore, whilst the physical cost of the movement isn’t covered by the freight, there is hidden value in the long run.
Another example of disparity between something’s price and its value can be found in the concept of ‘cargo-mix’. If a carrier exclusively fills their vessels with smaller-volume higher-freight paying spot bookings when space in the market is tight (such as during peak season), they risk excluding themselves from carrying the lower-freight paying, weekly high-volume bookings which are so valuable when space in the market is more abundant. The lower freight paying cargo may appear to have a less attractive return in the short term, but the cost of excluding this business in the long term is significant. Hence, it is important for a carrier to get a mix of cargo.

On that note, we are heading towards the beginning of the annual tender renegotiation period. Carriers will be looking to secure big volume cargo for 2013, at the same time as trying to concede as little as possible in the way of freight rates. The more volume carriers can fix on this basis, the better their forecasting will be for the year ahead. Over the next few months shippers will be putting out tenders for 2013 with the expectation that their volume of cargo will command a preferential freight rate – the higher the volume, the lower the freight rates offered. The problem carriers face is that today’s spot market rates are hovering around (or if some reports are to be believed, just below) the break even mark, so fixing themselves in to a long term deal at levels below break-even wouldn’t be ideal. Therefore, it is logical that the carriers strive to increase rates on Asia-Europe as soon as they can. If negotiations for 2013 start at a higher level then there’s more room to negotiate down below spot rates without heading in to lossmaking territory. Essentially, the value to carriers of a successful GRI in November is far greater than the increase in price proposed. The timing of the GRI is such that if they can get freight rates up in the short term it will lead to a far healthier year ahead. With this in mind, it may be that we see more price-discipline in the coming weeks than we have done following the last few attempts to hike freight rates – but not without more balance between supply and demand.

Thanks for listening