FEATURE: Container shipping bottlenecks will support record freight rates into 2021

Strength in the container industry signals a crunch in the supply chain, with changing demand patterns creating logistical challenges that are likely to keep freight rates at record highs going into 2021, analysts and sources say.

Demand for prompt-loading container freight has risen dramatically in recent months. Much of this has been due to PPE imports, especially from China to Europe, which have resulted in higher-than-anticipated freight rates.

This additional buying interest has come amid a downtick in typically dominant sources of demand for containers, such as clothing, which has seen a significant decline in volumes through the year, with many shops shuttered around the world.

Instead, large swathes of the population have stayed at home during the pandemic and with government subsidies for furloughed workers there has been a switch in consumer preferences. Money that was going on bars and restaurants is going on material goods, to the benefit of the freight sector.

The spike in demand for their services has exposed some choke points in the system. With skeleton staffs working at ports and in warehouses, there have been delays in returning empty containers to ports to be relocated.

Platts Container Rate 11 – North Asia-to-UK – saw significant upside in mid-November as bottlenecks persisted and demand spiked ahead of the UK's departure from the European Union, with vessel utilization levels reaching peak capacity. This also comes as equipment shortages continue to plague North Asian ports, and delays in container loadings in UK ports have meant that fewer empty containers have returned, prompting some container carriers to add congestion surcharges to ports on this trade lane.

PCR11 was assessed at $3,000/FEU on Nov. 19, up 50% from the $2,000/FEU seen a month earlier.

What next?

"The heart-lifting scientific breakthrough for a potential COVID-19 vaccine is now diverting the world's attention to the logistics of how will it all be moved when it becomes available," analysts at maritime consultancy Drewry said in a research note Nov. 17.

"The current state of the container market is one of dysfunction, bordering on chaos," the analysts said. "Supply chains have been stretched to near breaking point by the unprecedented volatility in demand swings, the tell being numerous port congestion notices popping up in all continents, from Sydney to Felixstowe and many places in between."

The problem right now is not so much that there are insufficient numbers of ships, or to a lesser extent containers. Rather, it is an inability to get them to where they are needed in a timely fashion. "Carriers having been throwing capacity back into the market but landside bottlenecks and long queues outside of ports all point to an infrastructure that cannot cope with sudden big peaks in activity," the Drewry analysts said.

Hopes of a vaccine potentially spells the end of the logistical issues that have dominated the market, but it could take some time for the resumption of normal operations.

As such, shorter-term carriers are expecting rates to stay firm well into the new year as there appears little chance that these logistical bottlenecks will ease in the next few months due to antiquated systems within the container industry.

"There is no hope for shippers to get low rates now until the end of Q1," said a UK-based carrier source. "Carriers will manage capacity to ensure strength into the new year."

This policy of void sailings to reduce exposure on the supply side had been used throughout the summer months to support rates, when cargo volumes have seen decreases. Many in the market expect this to become a mainstay of the carriers' arsenal going forward in order to support rates.

"The time for cheap shipping may very well be over, at least short term," a freight-forwarder said.

Volumes edge down

There are signs from corporate interim reporting that volumes have slipped.

Danish container shipping giant Maersk reported a year-on-year fall in bunker consumption and an even larger fall in bunker costs during the third quarter, it said in its Q3 interim report on Nov. 18.

Consumption of bunker fuel in Q3 fell 6.5% on the year to 2.621 million mt due to blanked sailings and idle capacity, Maersk said.

S&P Global Ratings forecasts a drop in shipped container volumes for 2020. The agency said in October that it forecast a drop in shipped volumes of 5%-10% in 2020 compared with 2019, versus its previous prognosis of up to 15%.

Participants in the market are expecting rates to stay firm into the start of 2021, as the equipment shortages across Asia will take some time to ease, regardless of falling demand on the front.

Looking further out however, expectations that the new COVID-19 vaccine will open the retail market once again is providing bullish sentiment for freight carriers, with extra demand due to stem from sectors such as clothing, which have seen a real downturn in sales this year to date.

The orderbook on the container side is still relatively sparse and some are expecting there to be more leasing of vessels. All vessels over 13,000 twenty-foot equivalent units are currently in operation and the idle pool is filled only with smaller sized vessels, hinting that extra capacity is limited if demand starts to rise.

With rates on key trade lanes remaining strong for some time to come however, there are expectations that these costs will have to be passed on to the consumers and end users.

S&P Global Platts Analytics' base case global economic view for 2020 is a 3.8% contraction, which will give way to growth of 5% in 2021. This will in turn lead to less pronounced growth of 4% in 2022, Platts Analytics said in its Global Economic Outlook Nov. 16.