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On a knife-edge.
Drewry’s latest Container Forecaster report, published last week, highlighted the key trends facing the industry as well as providing subscribers with detailed insights that underpin our current market outlook. The headline takeaway is that our confidence in the market is rising, although we recognise that many challenges persist. For now, however, we believe the industry is moving in the right direction and will make an operating profit in the region of $6 billion this year, with that sum rising again next year.
World container port handling rose by nearly 6% in the first half of 2017, although Drewry believes this will slow a little in the second half, giving a full-year rate of 5.5%. The recovery of the world’s containerised trade this year has been surprising. Seen through the other end of the telescope, with hindsight we can now fully appreciate the truly appalling state of world trade in the past couple of years.
At the start of 2017, it was hard to be entirely optimistic for any recovery with numerous risks hovering:
• The prospect of populist governments being elected in Europe
• How new US President Trump would deal with America’s trade imbalance with China and Germany
• Whether Trump would reverse the rehabilitation process between the West and Iran
• Political scandals at the highest level in South Africa and Brazil
• Ongoing outbreaks of terrorist violence in European cities
• The flow of immigration into Europe
• Brexit and the possible break-up of the EU
Now, at the start of the final quarter of the year, while many of these issues have not completely gone away, none appear critical enough to provoke any economic derailment. After the caution of the previous years, that lagging trade has flowed in to 2017 when economies have simply got back to doing business.
The world has restocked and normal growth patterns are once again reasserting themselves, but for next year we believe there will be a regression to the mean that will result in lower rates of growth in the short to medium term.
The profit outlook for carriers will be heavily tied to what happens in the approaching European contracting season. Drewry’s latest freight rate forecast for 2017 and 2018 is brighter than the picture painted back in June. This is linked to the strong fundamentals and improvement of the liner operators’ negotiating position – even if the most recent spot rate movements on many routes have been trending downwards. In many cases, these look to be temporary in nature.
There is little change for our 2017 forecasts with blended all-in (spot and contract) rates projected to increase by 15%. Spot freight rates have been helped this year by improved carrier discipline and a return to prudent commercial strategies. Rates are expected to rise again next year, but not at anything like the same margin as this year. Many shippers will be reluctant to agree to significant increases for the second year in a row. Ocean carriers may well have negotiated much improved contracts in 2017 across core trades, but that was relatively easy from such a low base. Next year is a much sterner test for them, particularly with slower demand growth and as much 1.3 million teu worth of extra slots hitting the water.
Fortunately for carriers, they are now highly skilled in the art of capacity management. Dealing with the influx of new tonnage and where to redistribute the existing ships is something they have been forced to repeatedly deal with and they have coped well in 2017 so far, although they have had the distinct advantage of strong headhaul flows to soak up newbuild ULCVs. That task will be tougher next year, but for now we have faith in their abilities to manage the process, something that will become more streamlined as the number of competitors shrinks.
Drewry will be conducting a webinar on the container freight rate and shipping market outlook on Tuesday 24 October. To register for this event please click the following links for one of the two time slots (all times UK):
The container market is looking much brighter than it has for some time. However, there remains much that could dampen our optimism. For carriers to thrive, they must stick to the path they have trodden this year.
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