Container shipping evolving to face ultimate Q3 test
The three key container shipping alliances, 2M, Ocean Alliance, and THE alliance, have limited the damage from the collapse in global trade and buoyed freight rates through the first half of the year. With tentative signs of a recovery emerging, shipping carriers may be easing their strict limits on sailings. But the crucial third quarter could be the industry’s toughest test yet.
Blank sailings have accounted for around 15% of active twenty foot equivalent unit, or TEU, capacity since the coronavirus hit at the start of this year but this is now easing, according to the latest research by eeSEA, a platform that maps, measures and predicts container industry schedules.
July blank sailings are at their lowest since January, accounting for just 8% of capacity, eeSea research shows, with August and September scheduled to be below 5%. That compares with 12% in June and 18% in May. “The question is whether the blank sailings are enough,” said eeSea CEO Simon Sundboell in an interview with S&P Global Platts.
Sea-Intelligence’s latest data, meanwhile, signaled a marginal increase in Q3 blank sailings announcements in their mid-June release.
It’s true that 2M, Ocean Alliance, and THE alliance have become more adept at managing the market on the deepsea East-West trades, with void sailings down at one month notice compared with two to three previously.
“That means they are better at adjusting to rapidly changing demand patterns,” Sundboell said.
“We are down to about a month’s cancellation notice, so we are pretty firm for June and going into part of July. There can still come more cancellations for August and September, but it’s not just that we are seeing cancellations stopping, we are even seeing some being reinstated,” he added.
Third quarter test
Sundboell said this shows a greater confidence that the market may have turned a corner as the carriers will want to maximize the utilization of those container ships.
That’s especially going into peak period where demand tends to be stronger, but there is still so much uncertainty over the recovery, or whether there will be a second wave in the virus hampering seaborne trade.
“The third quarter is supposed to be the peak season, and the lower level of blank sailings is a good sign for the carriers. But the fact that they are still cancelling sailings is not something we’ve seen in previous years; and such, is also worrying for them,” Sundboell said.
Alan Murphy, CEO of Sea-Intelligence, said the carriers have shown they are capable of weathering a second wave of the pandemic, at least in the short term, with blank sailings employed as the primary means of managing the supply-demand balance, in an effort to maintain freight rates.
“That said, even without a second wave, we are not out of the woods yet,” Murphy said, noting that “for several weeks we have been warning the initial round of blank sailings covering just Q2 implies either the pandemic impact would magically disappear in Q3, or, considerably more likely, that the carriers had just not planned the blank sailings for Q3 at the time.”
“Expectedly, we then saw 2M and THE Alliance come out with their Q3 blank sailings programme last week, and we are still expecting more blank sailings from Ocean Alliance, as they have so far blanked a much smaller share than the other two alliances,” Murphy said.
“We do not know what the medium-term impact of the pandemic will be, but we are very unlikely to avoid a serious volume contraction over last year, over the peak season,” he said.
Murphy and Sundboell both noted that the industry was in unchartered waters. They questioned how long the tactical line would hold but were also keen to stress that nobody wants to go back to a market share battle.
“Blank sailings are here to stay, and are now an integral part of container shipping,” Murphy said.
“The carriers have now managed to apply them with great success, if success is measured in terms of maintaining sustainable freight rates. If success is measured as the ability to provide stable services, then blank sailings is the exact opposite of success,” he added.
Murphy and Sundboell said the carriers have proven that they are able to weather the current crisis better in terms of freight rates than any crisis before, exactly because they are now much better at tactical capacity management.
Blank sailings has only really become possible as a consequence of the past five years of unprecedented level of consolidation.
“If there was still 20 global carriers and the alliances were not as comprehensive as they are today, blank sailings would likely not have been effective in balancing supply and demand, freight rates would likely have tanked at the start of the pandemic, and several carriers could likely have been facing bankruptcy, which in turn could have been even more disruptive than the blank sailings,” Murphy said.
Sundboell also pointed out that “the classical supply-demand game is being played out between the carriers [and also between them] and the cargo owners.” He noted that these alliances are “finely balanced” but “probably where they are supposed to be,” following the industry consolidation.
Platts Container Rate 13 – North Asia to West Coast North America – has risen considerably in recent weeks following a largely stable year to date, rising $75 from January 6 to $1,675/forty foot equivalent unit on May 29, however, this subsequently jumped to $2,750/FEU on June 17 on the back of a short-term spike in demand and void sailings on Pacific routes.
With the rates rising as they are on the trans-Pacific lanes, some market participants are expecting an increase in the number of previously voided services that are being reintroduced to counter this demand, and try and move some rolling stock left at north Asian ports.