Container market reels from quiet Q1; volatility looms
The container market around the world, especially on ex-North Asia head hauls, has seen some significant downside over the first quarter of the year, largely after the Lunar New Year holidays — typically a quiet period for the container market.
This has however had big ramifications for annual deal-making with carriers negotiating rates at a weak point in the market, which is likely to add downward pressure in an already uncertain market, especially ahead of the International Maritime Organization’s 2020 global sulfur cap.
SLIPPING FREIGHT RATES
Q1 has seen rates plummet on the whole, with Chinese New Year and the associated lull in exports from Asia largely to blame for the fall, which has continued into March as the behemoth of Chinese industry gently cranks back into life after the New Year celebrations.
This quarter has also been marred by geopolitical issues, with US-China tariffs expected to come into force at the start of the year prompting significant front-loading of imports on trans-Pacific eastbound routes. However, these tariffs were subsequently delayed until March and then, as the curtains drew on February, extended again, potentially paving the road for a last-minute restocking of an already well supplied US market.
This is especially important this year as, with the US economy forecast to grow strongly, there should be an associated bump in imports along trans-Pacific routes. This should aid rising rates in general, which are still loitering significantly below January levels, with some market participants not expecting a full recovery until May.
In Europe the key geopolitical issue is Brexit — the process through which the UK will leave the European Union. This was initially scheduled to happen on March 29, but EU leaders have granted the UK an extension until May 22 if UK Members of Parliament agree to the EU withdrawal deal proposed by UK Prime Minister Theresa May and only until April 12 if they don’t.
Players in the container market have eying this situation carefully in recent weeks. There are questions around the possibility of tariffs on goods being implemented, reduced or increased, and many UK-based importers are stockpiling ahead of a potential No-deal Brexit.
Meanwhile, the market is now just nine months away from perhaps its greatest challenge ever — the implementation of the IMO’s new regulation that will see the sulfur content in marine fuel drop from 3.5% to 0.5% and its serious knock-on effect on fuel prices and associated freight rates.
As carriers move from high sulfur fuel to low sulfur fuel, there will be multiple factors with which they will have to contend in their Bunker Adjustment Factor (BAF) mechanisms, not just related to the change in fuel but also the adoption of scrubbers into the market. BAF mechanisms are an additional surcharge imposed by carriers in order to mitigate bunker fuel price increases.
While the scrubbers uptake in the container market is not expected to be significant — in the 2%-3% range for container vessels by 2020 — there still will be issues surrounding pricing BAF for scrubber-installed vessels. This comes alongside the shorter-term issues of capacity management when loops of the global fleet are in dry-dock, taking capacity off the high seas and potentially leading to the rolling of some container stock.
Shippers are already voicing concerns over the diversity of the BAF mechanisms being pushed by carriers at the moment, with several additional surcharges and a lack of transparent methodology all affecting the all-inclusive freight rates. This situation appears to be a thing of the past, with most freight rates now including a separate floating bunker charge.
With annual negotiations between container shippers and carriers for their yearly freight well under way, and in many cases concluded or nearing completion, there is an air of uncertainty surrounding the market. As shippers tend to reference spot freight rates during annual contract negotiations, they have a better chance to secure discounts in a weaker market, sources said.
“The fall in the market is more dramatic than usual [for] this time of year,” said a carrier source. “And this couldn’t come at a worst [time] as we are now in the period of negotiating annual contracts.”