Supply, Not Demand, to Decide Container Cargo Rates

By | 27/11/2015

Supply, Not Demand, to Decide Container Cargo Rates

This year, container freight rates have been dropping. Freight rates for European routes, which began on 9th January at 905 dollars per TEU for cargo originating from Shanghai, dipped below 300 dollars per TEU for three weeks in June and three weeks in October, thus registering a price that is the lowest ever in history. Rates for North America routes have dropped continuously with the US West Coast registering 1,930 dollars per FEU on 9th January and 1,166 dollars on 23rd October and the East Coast charging 4,500 dollars per FEU on 1st January and 2,163 dollars on 23rd October.

Freight rate trend for East/West routes

Freight rate trend for East/West routes (Source: Shanghai Shipping Exchange)

 

Causes for falling freight rates for East/West Routes: Oversupply

Two things are suggested as the causes for the steadily falling freight rates for the trunk routes between East and West. One is the forecast that East/West routes will see a sharp increase in supply, with delivery of ultralarge vessels of minimum 18,000 TEU, which started in 2013, culminating this year and continuing to increase sharply until 2019.

This will greatly increase the supply of ultralarge vessels to East/West routes. The delivery of ultralarge vessels of minimum 12,000 TEU was 480,000 TEU in 2013 and 640,000 TEU in 2014, and will be 810,000 TEU in 2015, 500,000 TEU in 2016, and 600,000 TEU in 2017. Namely, as the delivery of ultralarge vessels climaxes this year, it was a foregone conclusion that freight rates would fall for East/West routes.

If we look at the increase in world container ship capacity since 2012, it culminates with an increase of 7.6% in 2015. Especially, ultralarge vessels of minimum 12,000 TEU register an annual average growth of 25.9%, suggesting that the sharp increase in ultralarge vessels is a major cause for the increasing global supply of container ships. We should note that since the increase of ultralarge vessels can trigger a cascading chain reaction, actual increase in supply is larger than the growth as shown on the table below.

Global container ship tonnage trend by size

Global container ship capacity trend by size (1,000 TEU, Source: Clarkson)

 

Causes of falling freight rates for East/West Routes: Slowdown in demand (cargo volume)

Another reason for this year’s continued drop in container freight rates is the slowdown in demand. This year, freight rates have continuously fallen for European routes due to slowdown in export cargo volume with the slowing Chinese economy and delayed economic recovery in Europe. In contrast, the North American routes register stable growth in demand as the US economy is recovering.

<Cargo volume trend for European routes and North American routes>

Europe North America
Throughput
(1,000 TEU)
Growth
(%)
Throughput
(1,000 TEU)
Growth
(%)
2011 14,191 5.3 13,144 0.4
2012 13,520 -4.7 13,378 1.8
2013 14,176 4.9 13,838 3.4
2014 15,396 8.6 14,652 5.9
2015
(Jan~Aug)
9,957 -4.7 10,037 5.0

(Source: Japan Maritime Daily)

 

Especially China has shown drastic slowdown in cargo volume for both routes compared to last year. Cargo volume for European routes increased 6.6% last year while decreasing 4.1% by August this year. For North American routes, it grew by 6.3% while increasing only 2.3% by August this year.

<Out-of-China export cargo volume trend for European routes and North American routes>

China-Europe China-North America
Throughput
(1,000 TEU)
Growth
(%)
Throughput
(1,000 TEU)
Growth
(%)
2011 9,921 5.0 8,114 -2.0
2012 9,530 -3.9 8,234 1.5
2013 10,163 6.6 8,496 3.2
2014 10,860 6.9 9,030 6.3
2015
(Jan~Jun)
5,093 -4.1 4,316 2.3

(Source: Clarkson, Zepol)

 

Slowing demand growth has supply exercise growing influence on freight rates

Despite the recovery in the US economy, demand for maritime container transport will register a long-term low growth, in that low growth has been established with slowing Chinese economy, the delayed recovery of European economy, and the lowering economic growth in emerging economies. This means it is alright to regard the low-growth demand as a fixed factor for the container market.

Talking about future container cargo market, we will have to regard supply, not demand, as the factor that decides the freight rates especially for European or North American routes. In other words, the increasing capacity that focuses on ultralarge vessels seems to point to poor prospects for the freight rates for European and North American routes.

 

 

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 276