Update and Analysis of The Global Seafreight Market

This Update and Analysis of the Global Seafreight Market is exclusively for DSV Air & Sea and made by Lars Jensen CEO and partner in Vespucci Maritime. 

Lars Jensen has 19 years of experience in the shipping industry and has for the last 10 years worked as an independent market analyst.

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August 13, 2021

Conditions are going from bad to worse

It is now 14 months ago the sharp market reversal began. The initial surge was in the Transpacific where freight rates increased by 60% during the month of June 2020. At the time this was thought to be an extreme event as spot rate indices showed rates go to a staggering 2600 USD per 40’ container. After a small pause they continued upwards and as they neared 4000 USD per 40’ container the Chinese authorities called in the carriers for a friendly chat to try to curb rate increases. This led to Pacific rates stagnating as per the spot rate indices but had the side-effect of introducing new equipment surcharges and premium loading as well as setting the stage for a rate surge in the other deep-sea trades.

Fast-forward to August 2021. Spot level indications are now solidly over 20,000USD per 40’ container for both Pacific and Asia-Europe if you want cargo to move in the short term.

The question is whether this is – finally – the peak and shippers can look forward to more normality. In the short term all indicators point to a “no” to that question and in the medium term there are some extreme supply chain risks yet to be unfolded.

There is still no global demand boom

Container Trade Statistics (CTS) published the new demand data for the month of June 2021 and this data yet again re-confirms the trend we have seen throughout 2021: There is no boom in global demand. The notion that the current global problems is due to an unusual amount of cargo being moved globally is factually incorrect. In June the global demand was 6.8% higher than in June of 2019. This equals roughly 3.3% annual growth. For the combined 1st half of 2021 volumes are up 5.9% compared to 1st half of 2019 – an annual growth of 2.9%.

Such a level of global demand growth matches perfectly the expected long-term global demand growth trend and is well-catered for in terms of available capacity.

The problem is therefore not global demand. However, there is clearly an import demand boom specifically in North America where volumes are up 23% in 1st half 2021 versus 1st half 2019. This contributes to create severe capacity bottlenecks in the US.

Capacity bottlenecks.​

When bottlenecks appear this leads to delays in sailing schedules – which effectively removes capacity of both vessels and containers from the market.

The latest data from SeaIntelligence shows that in June such delays globally removed 10% of all vessel capacity from the market – in line with the trend seen for most of 2021. Even without a demand boom, the removal of 10% of available capacity has led to a capacity shortage in the market. This capacity problem can only be brought back into the market by resolving the bottlenecks and bringing the delays down.

Operational overviews from Korean carrier HMM shows that port congestion in major ports across the world in the beginning of August have gotten worse, not better. All else equal this will lead to more delays and hence the continued removal of effective capacity from the market in the near term.

A tangible example can be seen outside the port of Los Angeles/Long Beach in California. In the beginning of 2021 congestion issued peaked with roughly 25 container vessels stuck in a queue waiting to berth for several months. In May to July this was gradually improving and at one point the queue went below 10 vessels. As of the second week of August the queue is now exceeding 30 vessels.

This escalation in bottleneck problems has a multitude of reasons. One being that carriers have responded to the demand boom in North America by launching multiple new services with both small and big vessels. In itself this is positive news – it shows that carriers are indeed responding to the demand from the shippers and are increasing capacity.

 

However, this has two additional side effects.

One side effect is that the launch of additional capacity leads to a sharp increase in the amount of cargo the ports need to handle – and also a sharp increase in the demand for trucks, chassis, rail etc. on the hinterland part of the import. The hinterland capacity is not geared to handle such a surge and hence struggle in getting containers to and from the ports fast enough. This clogs up the ports, further delaying the vessels.

The other side effect is seen in all other trades around the world. As there quite literally are no available ships to be had at all, the insertion of for example new Pacific services can only be done because vessels are removed from other regional trades. These regional trades subsequently experience capacity shortages and increases freight rates. This also pushes up charter rates for smaller vessels. These used to cost some 10-15.000 USD/day pre-pandemic but now goes for 120-150.000 USD/day for short term charters in these new services. This pushes up the underlying costs and again serves to push freight rates up in all trades.

The near-term outlook

We are in the middle of the peak season and a demand slow-down is unlikely to happen as shippers are anxious to get their goods moved.

On the aspect of bottlenecks the overriding risk right now is the development of the new wave of the pandemic in China. The partial shut-down in Yantian a month ago led to ripple effects and shortages still felt in the market and was caused by just a few cases of Covid in South China, hereof some amongst port workers.

Over the past 11⁄2 weeks there has been an increase across China in locally transmitted cases of the Delta variant leading to increased amounts of localized restrictions and shut-downs. As of the morning of August 11th a port worker in Ningbo was tested positive.

In the best case this is an isolated case and will not spread and the overall new wave in China is under control and slowly burns itself out. In that case the supply chain problems will not worsen.

In the worst case – and that is a scenario which unfortunately is realistic – we will see partial shutdown of operations in Ningbo similar to the Yantian incident. This will have much larger ramifications than Yantian. Ningbo is a much larger port than Yantian, this would happen in the middle of the peak demand and it would likely spur exporters in the Ningbo region to try to move their cargo to Shanghai leading to severe road congestion in the region as well as likely severe congestion problems in Shanghai as well.

This is not a positive outlook, unfortunately, however shippers need to assess the current market risks and be clear on what their contingency plans are in case the situation escalates further.