‘Topsy-turvy’ times prevent market balancing

Drewry reports the latest round of U.S. tariffs means “eastbound transpacific flows could be hit with an opportunity cost of approximately 1 million TEU next year.”    Drewry has downgraded its forecast for demand for containerized shipping over the next five years because of what it says is a gloomier world economic outlook and rising trade tensions.
   Previously, the London-based consultants believed the balance of supply and demand in the industry would improve and by 2022 “at long last be close to equilibrium.”
   But the latest edition of Drewry’s quarterly Container Forecaster report suggests “the industry now faces being stuck with the current oversupplied situation for several more years.”
   “The anticipated rebalancing of the container market looks to have been postponed. That’s more bad news for carriers that are facing substantial cost increases as a result of stricter ship fuel standards from 2020,” said Simon Heaney, senior manager of container research at Drewry and editor of the report.
   This has been a “topsy-turvy year in the container market with demand growth oscillating on a quarterly basis, from the highs of the first quarter to the lows of the second. Growth returned with a vengeance in the third quarter, but no one can tell at this stage how much it was artificially stimulated by fears surrounding the latest round of tariffs issued by the United States and China or how hard the come down will be in the fourth quarter without the expedited cargoes.”
   Drewry said its rough assessment is that the latest round of U.S. tariffs, imposed last month, means “eastbound transpacific flows could be hit with an opportunity cost of approximately 1 million TEU next year.
   “That is a similar sum to what we pinned to the trade under our ‘medium intensity’ trade war scenario in the previous edition,” said Heaney. “It is an unfortunate fact that trade barriers could yet be raised higher with the prospect of further tit-for-tat measures. In such a fluid situation it is impossible to second-guess where this will end. With so many moving parts, all trade forecasts need to be treated with more caution than usual as they now have a shorter shelf life and need to be revisited after each breaking news or tweet.”
   Drewry also has raised its fleet growth rate forecast by 67,000 TEUs because of greater than expected new ship deliveries and fewer ships being scrapped.
   That may be a drop in the bucket — Alphaliner, for example, estimates global container ship capacity at 22.6 million TEUs —but Drewry said “the significance of the upgrade is larger as combined with a more pronounced downgrade for container volumes supply growth is now expected to exceed that of demand.
   “Such a scenario has clear negative implications for container shipping lines as without any meaningful narrowing of the gap between supply and demand they will have to continue to firefight capacity management on a week-to-week basis in order to prop up ship utilization and freight rates,” it said.
   Drewry also reported Thursday that its weekly World Container Index, a composite of container freight rates on eight major routes to and from the United States, Europe and Asia, is down by 3.1 percent from last week to $1,668.47 per 40-foot container. However, that is 29 percent higher than where it was a year ago.
    The outlook for freight rates and carrier profitability in 2018 and 2019 “is little changed from earlier estimates, despite the downward revision of trade forecasts and more bearish outlook for vessel supply. While the market remains fiercely competitive, there are signs that some aspects of predatory pricing practices are receding and carrier vessel deployment more disciplined.”
    The Freightos Baltic Index shows a 3 percent rise from the prior week globally to $1,673 per FEU.
    In the eastbound transpacific Freightos pegged the China-U.S. West Coast rate at $2,280 per FEU, down one percent from the prior week and the China-U.S. East Coast rate at $3,530 up one percent from the prior week. Those rates, however are 56 and 67 percent higher than they were a year ago, respectively.


   Zvi Schreiber, chief executive officer of Freightos, said,  “As the China-U.S. tariff war ratcheted up, many U.S. importers stocked up in advance of the high-turnover Thanksgiving and Christmas seasons. That meant several months of successful GRIs (general rate increases). In effect, peak season came early.”
   He noted a shipping bottleneck generally develops around Golden Week about Oct. 1 when China celebrates the founding of the People’s Republic and many businesses are closed.
   He said while that is “traditionally a favorable time for GRIs to stick — the September 15 and the October 1 GRIs were both canceled. It looks like peak season is ending early too.”
   Freightos said it is uncertain how much demand will pick up after Golden Week.