Ocean shipping bear market manoeuvres

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As border restrictions are getting tighter, countries impose varying measures to contain the spread of the virus and mitigate its impact; travel is being curtailed, ports are operating and ship entries being restricted. In brief, the maritime domain which is one of the root enablers of globalisation, and the medium through which 90% of world trade is transported, is continuing to face significant repercussions. But the ability of the shipping companies to rapidly adjust and control capacity in an uncertain demand environment has become one common thread.

Upamanyu Borah

A crucial connection point and enabler of trade worldwide, the shipping industry across the globe still faces serious challenges in the wake of the impact of COVID-19. Low cargo rates, overcapacity on shipping containers, disruption at ports and to crew changes, and rapidly evolving environmental regulations were just a few of the ways delivering some early year disruption to the shipping industry.

Despite all of this, the shipping industry has been operating through the pandemic. Talking about Asia Pacific, the majority of ports are operational, although congestion is evident in some countries, such as Bangladesh, India, and the Philippines, as a result of idling import cargo. The US and European ports have generally been operating normally, although many sites have reported sharply reduced business as global trade has slowed under the pandemic.

Global GDP growth, the lead indicator for seaborne trade, was forecast as a respectable 2.9% in 2019 and actually rose to 3.3% in January this year. April 2020 is generally seen as the first month to show the true impact of COVID-19, GDP growth fell to -3.0%. Since then, GDP forecasts have continued to go downward and at the halfway point of 2020, GDP growth was down sharply to -8.2%.

Indian ports sector outlook

According to a recent report by ratings agency ICRA, the port sector has shown some strong recovery signs in the month of July after witnessing modest decline in volumes in the early months of this fiscal following COVID-19 triggered lockdown.

While, the Major Ports witnessed 20 per cent decline in Q1 FY2021, the Non Major Ports declined by 24 per cent during the same period. However, in the month of July 2020, the rate of cargo decline decelerated with Major Ports witnessing year-on-year decline of 13 per cent and Non Major ports witnessing sharper improvement with decline of just 4 per cent.

The productivity setbacks have inevitably been more pronounced on busier handlers. Container vessels calling at Jawaharlal Nehru Port Trust (JNPT), which commands the bulk of Indian containerized trade, took an average of 34.6 hours in the April-to-July period, compared with a turn time of 33.6 hours a year ago, despite ship calls shrinking to 512 from 593 a year ago.

By terminal, average vessel turn times at JNPT’s busiest APM Terminals Mumbai increased to 44.4 hours from 33.6 hours. At the new PSA International facility in JNPT, April-July turn times averaged 31 hours, versus 25 hours last year. DP World’s Nhava Sheva International Container Terminal reported 30 hours, up from 28.3 hours.

Ships at Chennai Port incurred even longer turn times — 55 hours, up from 45 hours during April-July 2019. At Cochin, which hosts a DP World-operated transhipment facility, the relative numbers stood at 23.52 hours, up from 19.68 hours.

ICRA says the FY2021 outlook for the country’s port sector remains negative and although, there are early signs of recovery as witnessed by trends in July, the sustainability remains to be seen.

“The recovery in segments like containers may be more prolonged due to dependence on both domestic economic activity and global demand trends. ICRA reiterates its expectation that while general cargo throughput may witness 6-8 per cent contraction for full year 2020-21, the container segment may witness a decline of 12-15 per cent during the same period,” said a senior-level sectoral head of ICRA.

“The contraction in port cargo was driven by sharp fall in petroleum, oil and lubricant (POL) and coal volumes, due to decline in domestic demand and economic activity, while container segment was also impacted by subdued EXIM trade. With the easing of containment measures and improved demand for petroleum products and power, the POL and coal segment should witness recovery,” added the official.

Further, ICRA notes that some of the measures announced by the Ministry of Shipping (MOS) in the wake of COVID-19 pandemic to support various stakeholders should help the liquidity profile of entities like PPP terminals operating at Major Ports. But, sustained slowdown in cargo volumes will put pressure on their liquidity profile.

Matching capacity to weak demand

On the container ship side, pre-COVID-19 coronavirus pandemic, the idle tonnage in 2019 represented 5.4% of the available fleet TEU. As the shockwave from the impact spread, the idle fleet rose to 11.1% in March 2020. At the mid-point in the year, the idle fleet was 9.8%.

Following the coronavirus outbreak, more than 400 sailings were cut from schedules in April and May 2020, and availability of cargo space has decreased dramatically. By withdrawing huge amounts of capacity on the major trades, the carriers were able to adjust their space to the falling demand, pushing up rates while at the same time capitalising on lower bunker prices and consumption, and reduced network costs.

Rolf Habben Jansen, CEO, Hapag-Lloyd said, “A cancelled sailing can save 60 percent of the operating expenses of a ship, and when the advance bookings show the load factor of that ship three weeks out will be very low, it makes more financial sense for the carrier to cut the sailing rather than go ahead and sail half full.”

The tightly managed capacity through the second quarter pushed Hapag-Lloyd’s average freight rate up 3.1 per cent per twenty-foot equivalent unit (TEU), Zim Integrated Shipping Services (Zim) reported a 7.9 per cent increase in rate per TEU, and ONE’s average rate per TEU was up 7 per cent.

This was also clearly illustrated in Maersk’s interim results announcement, where the $634 million effect of losing 16 percent in volume was more than offset by a $305 million gain from higher rates, a $255 million saving through lower bunker prices, and lower fuel consumption and network costs from fewer sailings cutting a further $151 million in costs.

The slowing second quarter demand was more than offset by tightly managed capacity with Maersk blanking more than 160 sailings, pushing average freight rates up 4.5 percent to $1,915 per fourty-foot equivalent unit (FEU) during the period, accompanied by fuel costs that were 37 percent lower year over year through the second quarter. Net profit in the second quarter was $359 million, up from $134 million in the second quarter of 2019.

In an earnings call with analysts, Søren Skou, CEO, AP Moller Maersk said, “We took 20 percent of capacity out in April, and have been reinstating capacity and are 95 percent back to where we were before the pandemic.”

“We have plenty of opportunity to adjust back down again if we have to. Volumes are improving, but we will have to see how the world fares in a second wave. Our guidance for the year shows that there will not be another global lockdown but more regional or local lockdowns.”

With businesses gradually returning to pre-COVID production levels, most carriers are now operating normally, slowly restoring services as demand recovers.

MARKET OUTLOOK SEPTEMBER 2020 OCEAN FREIGHT RATES – ASIA-PACIFIC EXPORTS

ASPA-EURO  Carriers plan a new round of rate increases for September. Additional capacity has been added through extra loaders to balance out supply and demand. Space is extremely tight and rates continue to increase.
ASPA-AMNO  September rate levels are at a record high. Despite the cancelation of blank sailings by carriers and even the introduction of new capacity, ships continue to be full due to the strong demand. Another round of GRI/PSS is expected from mid September as carriers are anticipating the rush before the China Golden Week.
ASPA-AMLA  Demand has picked up from the beginning of August and currently outweighs the market capacity, with ECSA being more severe. Spaces are already full and rolling for 1st half of September and the situation is expected to persist for the entire month. On ECSA, carriers are imposing an additional USD 300/Cntr PSS surcharge.
ASPA-MENAT  East Mediterranean and Gulf continue with the tight space situation. West Africa maintains healthy utilisation with no surge in volumes. South and East Africa are showing strong volume increase. Carriers have started to implement rates increases and peak season surcharges from Mid August to September.
ASPA-ASPA  Capacity within Intra Asia Trade expected to remain stable in September following the recent revamp of various services by global and regional carriers. For IPBC Trade, blank sailings have been announced along with the GRI plan of USD100-200/TEU. Space for both Intra Asia and IPBC Trade are expected to be tight especially with the pre-Golden Week holiday rush in China.

Source: DHL

Shipper’s evaluation

The ability to flex capacity in response to short-term changes in demand is a strategy that has paid off handsomely for the carriers and could be a powerful factor in preventing a return of rate wars and the chasing of market share. This has been almost a default position in the past, with carriers undercutting each other on rates to fill surplus capacity and destroying profitability in the process.

The newfound discipline will be tested over the next two to three years, as carriers will take delivery of 86 ships of over 10,000 TEU in size, according to industry analyst Alphaliner. That’s almost 1.5 million TEU, and a large portion of the vessels will be mega-ships of greater than 18,000 TEU. With the world’s economies in recession, and any recovery expected to be slow and interrupted by coronavirus outbreaks, additional capacity is not something carriers will need over the next couple of years.

While carriers appreciate the profitability that blanked sailings bring, it is not a feeling shared by their customers. When sailings are withdrawn, especially on short notice, shippers must adapt their supply chains to accommodate the delayed cargo, and that erodes trust in carrier schedules that are critical for some sectors. Global on-time performance of carriers during the first six months never reached 80 per cent, with the lowest level of 64.9 per cent recorded in February, and 77.9 per cent in June, data from Sea-Intelligence show. That compares with an average reliability of 78 per cent for all of 2019.

Today, shippers and forwarders see availability of cargo space as the most important criterion of carrier service, and that improvement in availability in 2019 was a welcome development for the industry.

Shippers and forwarders believe that carrier performance deteriorated between 2018 and 2019 in four areas: the range of different available carriers, the range of different available services, the price of service, and the overall carrier service quality. However, they feel carrier performance related to sustainability and financial stability has improved since 2019.

“This is a market with volatile capacity, where liners remain price setters and keep freight rates high despite very low fuel indexes, while they can only plan in the short term themselves,” said Godfried Smit, Secretary-General of the European Shippers’ Council (ESC), a leading representative of the logistics interests of manufacturers, retailers and wholesalers. “Our view is that shippers will benefit from shorter-term contracts, and by either diversifying their carriers’ selection pool or by concentrating more on financially healthier or government supported carriers.”

Container shipping lines’ ability to provide cargo space as needed showed a marginal improvement at the start of 2020, but this gain will have been dramatically reversed by the end of the first half of this year, according to the fourth annual shipper satisfaction survey of Drewry and the ESC.

“Drewry foresees that the next ESC-Drewry survey will show growing concerns among shippers for three specific areas of service quality: availability of space and equipment, reliability of bookings and carriers’ financial stability,” said Philip Damas, Head of Supply Chain Advisors Practice and Managing Director at Drewry Shipping Consultants.

“These are key factors of carrier and forwarder selection particularly in today’s disrupted market, but also in the next year as and when ocean-borne volumes recover,” he added.

LCL services counter blank sailings and expensive airfreight

As normal operations start returning, the volumes of ocean freight will drastically increase since the majority of air freights available are currently being used for moving either PPE or medical equipment. Express less-than-container-load (LCL) services that are available on many lanes and forwarders have thus been a good alternative for air freights.

Ocean freight consolidators and forwarders have taken comfort in LCL volumes and services in the US trans-Atlantic trades. In recent months, more American and European shippers have turned to LCL services as a cheaper alternative to air freight and a way to counter ocean carrier service disruptions involving full-container-load (FCL) transport.

“Owing to the higher FCL and airfreight charges, freight forwarders on trans-Atlantic routes are opting for LCL to meet their cargo delivery commitments,” said Marc Stoffelen, Executive Director for ocean freight consolidator ECU Worldwide. “In addition, there are cargo capacity constraints at the moment and this situation is likely to continue. As a result, LCL volumes will remain stable in the coming months.”

Apart from ECU Worldwide, other consolidators such as Shipco are introducing so-called ‘expedited’ or ‘express’ LCL services to trans-Atlantic shippers and forwarders, a service concept that was launched earlier in the trans-Pacific to counter ocean carrier blank sailings and costly airfreight transport.

Although expedited LCL services are three to four times more expensive per cubic meter of freight than traditional LCL, they offer airfreight shippers that are currently pinched for capacity and seeing higher-than-normal air transport rates due to the coronavirus pandemic a rate that is two-thirds or three-fourths cheaper, if extra days can be allowed in the transit.

“As with the trans-Pacific express offerings, we use carriers with the fastest transit times; we offer late gates at origin container freight station and we have dedicated drop-off lanes at the CFS to expedite that process,” said Christine Solorzano, Vice President of US LCL Exports for Shipco Transport Inc. “We guarantee top stowage on the vessel to facilitate earlier availability.”

Solorzano believes the trend toward expedited LCL will continue. “They will most likely become a standard, even as we move out of this current situation.”

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