Peter Sand, chief shipping analyst at international shipping association Baltic and International Maritime Council, or BIMCO, expects container freight rates to remain elevated up to the end of 2020 on account of COVID-19 related uncertainties.
Speaking to S&P Global Platts recently, Sand highlighted that the intervention by US and Chinese authorities over high ocean freight rates was unwarranted and unprecedented. Edited excerpts of the interview follow:
Platts: What are your views on the recent intervention by the US and Chinese authorities on high freight rates and blank sailings?
Sand: This marks an unprecedented and unwanted intervention from any government. It is fair for authorities to monitor the state of competition on a global scale, but not for them to intervene in international business like this.
This is all rooted in the adverse trade politics that we are witnessing on a global scale. We have seen trade wars, between Europe and the US, between China and Australia, China and the US, and this is a continuation down that road.
China, the main exporting area for containerized goods, may also be feeling a bit of pressure from foreign investors deciding to set up new facilities in other Asian manufacturing countries like Vietnam and Cambodia.
This is not only because of the trade war, but also because of major retailers and cargo owners are looking to de-risk their global supply chains amid COVID-19.
Many car manufacturers witnessed an abrupt stop to their production lines earlier in the year and no company with such a scale of production can afford a repeat of what we saw earlier in the year. Which will mean that we will witness more growth out of other Asian countries as well.
China knows they have the upper hand because they have set up an efficient way of doing logistics to a scale where no other Asian nation is close. However, if the pressure and the need is strong enough for the industry to de-risk their supply chain and reduce the political risk they will find alternatives.
Platts: Did freight rates on the transpacific route shoot up due to an unexpected surge in demand and blank sailings leading to lower capacity?
Sand: I think both assessments are right. In May, freight rates started increasing due to the management of capacity through blank sailings. In July, August prices shot up due to a surge in volumes. At the end of the day it is a negotiation between liners and cargo owners on what the right freight rate is.
Spot freight rates may not be more than one third of the market. Most of it still moves on long-term contracts where the rates are much lower. But obviously, the longer you have high spot rates, the more long-term contracts run out during that time, and when they are up for renewal it will not be negotiated at $1,500/FEU when spot rates sit at $4,000/FEU.
Platts: How are high transpacific rates affecting other routes?
Sand: Liners are using the upper hand in negotiations right now to push freight rates higher on all the routes, but it’s not that they will get higher freight rates just by issuing a statement. For any shipping liner, higher rates in long-term contracts are more important because that is where they make or break in terms of their financial performance in the year. They make sure all their cost is covered and whatever is left they put it in the spot market. That is why you will not see financials of shipping liners exploding in light of these high spot freight rates, as the bulk of the cargo is moved under long-term contracts which are much below the spot rates.
Platts: When do you see freight rates cooling off?
Sand: We could be in for elevated freight rates for the next 3-4 months, simply due to the uncertainty and disruptions of volume flows. There could be some volatility in prices if volumes fall abruptly. However, blank sailings may limit this downward volatility.
There is a limit to how high and for how long elevated rates can be around. Hopefully, in 2021 we will see a more normalized market, where freight moves along the lines that we used to recognize.
Unemployment is rising and container shipping is very much driven by consumer demand. We may have governments propping up purchasing power right now but we are afraid of 2021, because when these government subsidies start to ease there will also be an impact on demand and transportation.
Platts: When will the container shortage start to ease?
Sand: Only when we have a flow like the ones we had before COVID-19. It is a constant challenge for liners to make sure that equipment is in the right place at the right point in time.
Carriers are seeking to get more boxes into the Asian region so there would be no significant shortage on the high volume trades right now, but equipment shortage may also play as an advantage to liners and push freight rates higher. So, if liners bring in more empties into an area, they will be lowering their own rates. It is part of the game as well.