There’s growing evidence that the days are coming to an end of the booming consumer demand, which saw container shipping hit record high levels of profitability over the last couple of years.
Drewry’s latest global port throughput index for April shows an increase of 1.7% month-on-month to reach 141.1 points, 1.5% below the 143.1 points recorded in April 2021.
“This is further evidence that the post-Covid demand boom appears to have run its course,” Drewry stated in a new report with many nations around the world battling high inflation and some of the world’s largest shippers indicating lately inventory overstocking.
The post-covid demand boom appears to have run its course
Likewise, the Drewry container equity index snapped its three-year long winning streak in the first half of this year. On a year-to-date basis, ending June 28, the index posted a decline of 23.1% versus the same period in 2021. The index is a market capitalisation weighted index of 12 listed liner companies.
Drewry is still predicting carriers will make improved profits over the records set in 2021, and that supply chain constraints will persist through the first half of next year.
Improved financial results are beginning to flow in with Hong Kong’s OOCL, a Cosco subsidiary, the latest to report its interims.
OOCL reported total revenues of $5.3bn for Q2 last week, up 52% year-on-year despite a 5.6% drop in throughput.
When comparing OOCL’s Q2 2022 performance to Q1 2022, Lars Jensen from liner consultancy Vespucci Maritime suggested “the wave might have crested”. In a LinkedIn post, Jensen noted that OOCL’s rates did not improve quarter-on-quarter, while volumes slid 5.6% year-on-year.
Spot rates may well be the three-card Monte of container shipping
Splash reported late last month on how spot rates on the transpacific have fallen below long-term contracted rates leading many shippers to start to look at the fine print of their contracts.
New analysis from Copenhagen-based Sea-Intelligence shows the unprecedented strength of durables goods consumption in the US is slowing down in recent months, headed for a gradual return to pre-pandemic levels.
“While we should stress that we believe it is too early to confidently declare that there will be no 2022 peak season, the continued signs of market weakness … are hard to miss: Spot rates tumbling faster than seasonality, congested capacity being re-activated, contracts being reopened, rate declines not driven by capacity injection, and … continued sluggish demand, utilisation dropping below the ‘magic’ rate-rocketing level, and a return to normal in US consumer demand for durable goods,” Sea-Intelligence stated in its latest weekly report.
Analysts at the Danish consultancy suggested that the “wild” carrier party might be over, or at least winding down.
“The signs are all suggesting a return to a more balanced market,” Sea-Intelligence reckoned, going on to predict the potential return of blank sailings if volumes dry up.
Looking at the average vessel utilisation on the head haul of each of the major east-west trades shows nominal utilisation dropping below the levels which previously sustained the higher rates during the pandemic.
The wave might have crested
Citing Container Trade Statistics (CTS) for May, Sea-Intelligence noted global demand declined by 2.8% year-on-year, the fourth consecutive month of year-on-year demand decline.
On the transpacific utilisation rates have dropped below the 90% level for the first time since mid-2020, according to Sea-Intelligence who said that this implies that capacity is finally beginning to open up. On Asia-Europe, meanwhile, utilisation rates are back below 80%.
Demand data shows clear signs of a weakening market with the annualised growth rate compared to 2019 rapidly approaching zero and firmly on a declining trend.
The latest market intelligence from online container booking platform Freightos points out that while spot rates may appear to be in a free-fall, they remain close to five times higher than they were at this time in 2019.
Nevertheless, China – US west coast shipments now cost about half what they did in April according to Freightos and are more than 30% lower than this time last July when prices were beginning their 80% peak season spike over the course of the month.
Taking issue with container shipping’s beholdeness to a wide variety of spot rate data providers has been John McCown, the well known US liner veteran and founder of Blue Alpha Capital.
“While they may have relevance directionally on a relatively small group of loads, the disparity among the various spot indices suggest that they aren’t even a refined measure of that group,” McCown wrote in a widely read article carried by Medium. More importantly, the industry’s focus on spot rates fails to reflect the level and trend of the larger group of contract rates that drive both the overall inflation impact and the profitability of the container shipping sector, McCown argued, going on to quip: “Spot rates may well be the three-card Monte of container shipping.”
When new contract terms are being discussed, McCown said tradelane spot rates that present a favourable comparison for the carrier are highlighted.
“Shippers will often agree to rates that appear to give them preferential treatment when in fact those rates are higher than most of the carrier’s other contracts. One side has the all the facts while the other side is operating with impaired vision. The shippers and others who give spot rates more credence than they deserve do so at their own risk,” McCown wrote.
Early indications based on two months of CTS volume and pricing data are that Q2 industry net income will be similar to Q1, McCown pointed out, explaining: “Put simply, higher net income at the same time that spot rates are down 23.7% underscores that spot rates aren’t a particularly relevant factor.”