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Drewry’s Global Freight Rate Index stands 37% higher after five months of 2017.
It is commonly accepted that the container shipping market is over-supplied with too many ships, yet somehow freight rates are soaring – Drewry’s Global Freight Rate Index stands 37% higher after five months of 2017 than it did in the same period last year. How are carriers achieving this seemingly impossible feat?
Fundamentally, when their backs were against the walls carriers adapted to the conditions and formulated a five-part trick that has allowed them to emerge (mostly) intact. The first part of the trick involves scrapping as many of the least desirable ships as possible. The next task is to mothball, or idle, other ships that have no immediate requirement. It also helps to defer deliveries of new ships that were ordered when expectations were more bullish; reducing the inflow of newbuilds so that changes to the existing service network can be kept to a minimum. The final two parts of the trick are the toughest – managing whatever is left in active service on a trade-by-trade basis through the cascade of ships into new territories without saturating them; and finally, anticipating monthly tradelane slot requirements and taking capacity temporarily out of the system through void sailings.
As we have analysed individual aspects of this juggling act previously on these pages, for this analysis we will focus on the output of all this hard work.
At the macro-level it is clear that carriers have focused their attention on propping up ship utilisation in the main East-West trades at the expense of other routes. Drewry’s headhaul ship utilisation index, as published in the quarterly Container Forecaster report, returned its best ever East-West load-factor reading for a first quarter in the first three months of 2017. In contrast, the North-South reading in 1Q17 was the worst of its kind on record and the long-term trend is down by roughly the same amount as the East-West index is rising.
A closer inspection of the trade lanes reveals that in five out of six East-West routes demand growth outstripped supply in 1Q17, with Mediterranean to North America being the sole exception (see Figure 2). This helped to provide more fertile conditions for both spot and contract rates in the East-West trades, evident by the fact that average spot rates in these trading corridors outstripped the global performance; Drewry’s East-West Freight Rate Index was up by 44% after five months of this year, seven points above the Global Freight Rate Index.
Carriers were less successful in matching supply and demand in the North-South trades as in our sample four out of eight lanes saw supply grow faster than demand in 1Q17.
The improvement in the supply and demand balance in the East-West trades was partly a function of stronger than expected volume growth that is outside their control, but even without that added bonus lines have continued to use one of the levers at their disposal: void sailings. Drewry research counted a total of 141 missed sailings in the first five months of 2017, which is down from the 259 counted in the same months last year. In both periods the greater number of void sailings occurred in the Asia to West Coast North America trade.
Anticipating the monthly supply needs is an extremely complex task, one made harder by the lumpy nature of volumes. The conundrum for carriers is therefore how best to accommodate the anticipated peak demand on any given route with sufficient capacity and then avoid costly overcapacity during non-peak periods. While volumes may be patchy through the year the seasonality is at least relatively predictable, which has enabled so-called “slack season” capacity cut back programmes to become a regular feature for the industry.
The previous data sets in this analysis covered changes to supply in the first quarter, i.e. before the alliance restructuring that occurred 1 April. To see how things look after that momentous date table provides a summary of capacity for dedicated services as of May 2017 with comparisons to the same month a year prior.
One of the main takeaways is that trades that experienced a big increase in average ship size have either had to reduce the number of weekly services (for example Asia-Med and Asia-East Coast North America) or take a worsening oversupply situation on the chin (Med-North America). Also, for fast growing trades such as Asia-WCNA and Asia-South Asia carriers’ preferred option is to introduce new services rather than upgrade the size of ships, creating greater space to cascade ships into. It is perhaps unsurprising that with more services to manage the number of void sailings is more prevalent in Asia-WCNA than elsewhere.
It is also notable than even as bigger ships are cascaded into North-South trades the average size ships used in those lanes is yet to increase significantly, which tells us that the declining ship utilisation trend is also a function of relatively weaker demand growth.
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