Shipping

Congestion charges

Top shipping analyst discusses why container rates are surging

Parash-Jain-w

Jain: bullish on freight rates

The world’s supply chains are in crisis. Long delays in the shipping of containers mean there is a real possibility of shops having empty shelves in the lead-up to Christmas. The hold-ups are already feeding spikes in the prices of many goods, fuelled by a spectacular surge in freight rates. Bottlenecks in the world’s ports are getting most of the blame, with Morton Engelstof, chief executive of APM Terminals, a major container port operator, warning in the Financial Times this week of a “vicious circle” for terminals that can’t clear their backlogs quickly enough to keep up with new demand.

WiC caught up with Parash Jain, HSBC’s global equity sector head for shipping and ports, for more on what’s causing the container crunch and how long it’s going to last.

It’s boom time for freight rates and shipping charters?

Spot rates for containers have been on a huge roll. Last week the Shanghai Containerised Freight Index, which shows current freight prices for container transport from the main Chinese ports, increased for the 17th consecutive week and the index is now up 244% on the same time last year.

Containers on key lines such as the Transpacific route are being priced north of $10,000. But we think that upcoming rate hikes and increases in port congestion over the peak season will actually bring higher prices in the remainder of the year.

The industry is seeing similar increases for charter rates for container ships: 4,000-teu vessels are being charged out at more than $70,000 a day for year-long contracts, which is more than twice the levels of the previous peak in 2005. Some shorter-term contracts are being priced even higher at more than $100,000 a day.

What’s driving the surge in freight rates?

It’s largely a supply-side story. By that I mean that it’s mostly related to the problem of congestion at ports, which is having a huge impact on the wider market.

The current cycle in freight rates started in June last year when the US economy began the process of reopening after a period of Covid-related disruption. This unlocked pent-up demand from American consumers, many of whom had more disposable income than usual. Much of the surge in their spending has been for consumer goods and home improvement items but retailers had cancelled many of their orders because of Covid earlier in the year so there was a sudden rush to replenish inventories.

And now we are into peak season in advance of the Christmas period, which is fuelling demand for freight space as well.

The problem is that the supply chain is struggling to cope. Even though the main ports on the US West Coast have been setting records in container throughput for months, it’s still not enough to meet demand. The number of vessels at anchorage has risen to record levels and waiting times are well above average, including ports in China as well. These longer waiting periods tie up shipping capacity and the availability of containers, putting further pressure on rates.

Are the reasons the same for the congestion at ports in China?

Covid-related disruption to operations has been a factor in most ports but the problems in the United States have been worsened by weaker infrastructure after a long period of under-investment. Unions there have also resisted changes in working practices that could improve productivity, like greater automation.

The reasons are more specific to Covid in China, which is home to six of the 10 largest container ports. Disruption there has often been more of a result of quarantines or shutdowns.

The government policy towards Covid is zero-tolerance, with cities facing lockdown after the discovery of just a few cases. The closure of the container terminal at Ningbo-Zhoushan for two weeks in August is a classic example, happening after a single infection in the area. Something similar happened at Yantian port in Shenzhen in May, when shutdowns and reduced operations created long delays. At one point more than 40 vessels were waiting at anchorage for a berth.

The economic impact of these closures seems severe, given the small number of cases?

China has its own approach to curtailing the risks of the pandemic. It can also fall back on a robust domestic economy capable of absorbing a few weeks of reduced exports. And it probably helps that the Chinese ports are better positioned to ramp up handling capacity more quickly after a slowdown than countries like Bangladesh, Vietnam or Thailand.

The delays are a boon for the container shipping lines?

They’re the biggest beneficiaries of the situation. The lines generally own more than half the vessels in their fleets and lease much of the remainder on longer-term charters. So these operating costs are controlled at a time when revenues are soaring because of the rate hikes.

Yes, their ships are out longer on the water because of delays at the ports. But the extra costs of the congestion are more than offset by the increases in freight rates.

How long could the disruption last?

The rule of thumb is that it takes three days to clear each day of disruption. So it will take 12 days to clear the backlog from four days of shutdown, for example.

Unfortunately it’s going to take longer to remedy the situation during peak season like now, when port infrastructure is already running at peak capacity. Say a container terminal is set up to handle 100,000 boxes a day but it needs to clear 300,000 boxes of delayed shipments over a 10-day period. So it now needs to run at 130% of standard capacity over the period to clear the backlog. That’s not easy, especially for terminals already running at full throttle.

So when do you think the backlogs are going to clear?

The shipping lines and logistics firms don’t seem to think there will be much respite until the Chinese New Year holiday period at the start of February next year. That’s traditionally a quieter time for the shipping sector, which could bring an opportunity to get things back into a steadier position.

But some analysts are saying it will take much longer to resolve the delays – maybe not until the end of next year.

It is very hard to say what will happen next as there are so many moving parts. Let’s just consider China’s Covid quarantine policies as a single factor. Currently the target is zero cases of infection, meaning that a single instance of Covid will be seen as one too many by the authorities. But what’s the likelihood of absolutely no cases of infection over the next six months?

We just heard that there was a case in Guangzhou last week and on the following day at least half the flights from the city’s airport were cancelled.

If similar protocols are maintained there is always going to be the risk of disruption in cities with container terminals, with subsequent impact through the wider supply chain.

Bear in mind that even if just one port or route is the pain point, the impact is soon felt elsewhere, because shipping is a global industry.

What about more supply in the form of a larger container fleet? There’s talk of bulk carriers being repurposed to carry containers too?

There have been stories in the media about some of the larger retailers taking long-term leases on vessels to protect themselves from further hikes in freight rates. A few bulk carriers are experimenting with carrying containers as well, although they will have to resolve challenges in areas like insurance and handling.

Most likely is that new arrangements like these will focus on the back haul [out of North America and Europe], not the head haul. One of the dry bulk vessels has just returned from Europe with 200 laden boxes and 1,400 empty ones, for instance. But the situation is unusual, which is why it is getting mentioned in the media. These aren’t normal times.

What we do know is that there will be more ships joining the container fleet fairly soon. The lines have been ordering new vessels in unprecedented numbers over the last three quarters, from a trough of 8.2% of the existing fleet last October to over 21% of the fleet today.

But container shipping is only a single part of the supply chain, which is only as strong as its weakest link. Yes, there have been periods when there haven’t been enough ships or boxes available. But that’s not necessarily the case right now: the problem is more that there is a shortage of boxes out on the water because too many containers are stuck landside in ports and warehouses or on trucks. And the single largest factor is Covid-related restrictions and delays, which mean fewer workers, poorer productivity and slower turnaround times.

Of course, the context should change as the disruptive effect of the pandemic fades further. My estimate is that between 10% and 15% of fleet capacity is tied up due to congestion in the supply chain, all of which should come back into the market once the situation begins to ease. In two years time, another 8% of current fleet capacity will arrive in new deliveries as well. Combine these two factors and that’s a lot of additional capacity compared to today, especially in a situation where demand can’t grow much beyond annual averages of 3%.

That suggests there’s bound to be an anti-climax ahead for the shipping lines as freight rates come down. It could come as soon as the second half of next year or perhaps a little later in 2023. But it’s a matter of when it is going to happen, not if…


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