Following Far East-Europe Freight Rate Fundamentals
The Far East–Europe mainlane sits at the top of the global route hierarchy. It is where most of the ultra-large containerships on the orderbook are designed to be deployed. As such the cascade process – the redeployment of relatively smaller tonnage down to other routes as larger ships are delivered – is crucial in determining running capacity which, in conjunction with trade volume growth, largely drives the level of the freight market.
Tracing the Pattern
The unprecedented 15% contraction in westbound Far East-Europe box trade volumes witnessed in 2009 led to a plunge in freight rates – carriers could not reduce capacity fast enough, as shown on the Graph of the Month. However, trade recovered more quickly than anticipated, leading to a rapid rate improvement, peaking at over $2,000/TEU according to the Shanghai Containerized Freight Index (SCFI).
Yet from mid-2010 operators continued to pile on capacity (or not cascade enough off to counterbalance the delivery schedule) while trade growth declined. This produced a long (2010-11) decline in freight rates. The sharp recovery in the rate in early 2012 was only made possible by a long spell of coherent capacity management by carriers. At last they were able to reduce running capacity in line with trade volumes.
This year, a 64% fall in rates in 1H 2013 came as volumes remained slightly down y-o-y, while supply increased by an average of around 5% y-o-y. However, a short-lived summer rate recovery was aided by the return of positive trade volume growth on the route, while capacity growth was just about kept in check, slowing to 2% y-o-y. And yet, the recent steep decline in freight rates that followed (down to the average of $920/TEU in September shown on the graph and just $661/TEU by mid-October) strongly suggests that cascading has not since kept pace with the very heavy large ship delivery schedule.
The Never Ending Story?
It’s not hard to see why. 81% of the total containership capacity on order is accounted for by 8,000+ TEU vessels. Even if trade growth pick up, deployment of large ships inevitably needs to be spread onto a number of other routes, including the Transpacific and the larger North-South trades. The integration of 16-18,000 TEU vessels onto the Far East-Europe trade may provide momentum to the cascade process, as smaller VLCSs will struggle to compete on a cost per TEU basis.
In the medium-term, one view is that the Far East-Europe trade may become a self-contained micro-market, with only the very largest containerships deployed. Regardless, at the moment the Far East-Europe freight market remains under severe pressure, with operators struggling for profitability. Even five years after trade volumes collapsed, carriers still have to work very hard indeed to cascade enough capacity to offset substantial large boxship deliveries.