How the charter and container markets have collided

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The shipowning and finance side of the container industry on the one hand, and the liner and logistics side on the other, operate generally in isolation.

There is different vocabulary, largely separate conference and events circuits and a contrasting set of concerns and metrics.

In normal times the day-to-day logistical headaches liner companies, shippers, forwarders and terminals must suffer are of limited relevance to vessel owners, and it is unusual even for logistical problems to drive freight market fortunes.

Of course, these are not normal times. Container markets have received a shot in the arm from both ‘fundamental’ and ‘contingent’ factors. Sat centre stage is a colossal transpacific peak season that has sucked in ships and boxes from other, relatively less profitable tradelanes.

At a global level, a huge volume of container trade has been compressed into a short period of time, at a point when supply chains and liner company networks are stretched to their limits.

In moments of severe strain, however, inefficiency acts in a similar way to slow-steaming in requiring a larger volume of tonnage to transport a given volume of teu trade. This is all the more the case when volumes are high and $ per teu revenues are elevated, changing liner company incentives.

The longer vessels are tied up in port, the worse the weather, the more that carriers feel regulators breathing down their necks over poor service quality, the more that containers need to be feedered out of transhipment hubs so liner companies can avoid the worst bottlenecks: the solution to all of these issues is to throw as much container-carrying capacity as possible at the problem until it goes away.

Hence the current owners’ time-charter market and reports of liners turning to celled MPP vessels to meet their requirements.

These logistical logjams are not the entire story: the most recent data are not yet available, but the volume of container liftings in the final quarter of this year is almost certainly high by any historical standard.

The economic impact of Covid-19 has disrupted normal seasonal patterns and, across a number of tradelanes, an unusual volume of activity that would normally be spread more evenly across the year (and some that would normally take place in the following year) has been concentrated. It is the combination of high teu volumes and stretched liner industry capacity that explains the extent of the surge in both freight and time-charter rates.

This outcome is, obviously, not what a high-level supply vs demand analysis would have predicted. The chart below displays our headline incremental demand and supply projections on a full-year basis, alongside our aggregate fleet utilisation rate.

So how do we see the current madness playing out over the coming quarters and years? There is a need here to try to distinguish shorter-term contingent factors which have likely near-term solutions, with more fundamental mismatches between containership capacity available and an exogenously determined volume of demand.

The line between a shortage of containership slots driven by ‘fundamentals’ and one driven by ‘circumstances’ is, of course, faintly drawn. In a celebrated 1970s TV sketch, comedian Eric Morecambe, sat before a piano, declares: “I’m playing all the right notes, but not necessarily in the right order.” An analyst looking at global supply-demand balances in late 2020 might declare: “You’ve got all the right ships, but not necessarily in the right places.”

MSI’s approach to forecasting has always combined trust in our models, tempered by respect for the power of events. We need to consider both how challenges in the maintenance of liner networks can throw up unexpected sources of feast and famine for vessel demand, and also how supply and demand fundamentals determine the range of likely outcomes thereafter.

What this means in terms of our forecast is that, given time and fewer disruptions to normal seasonal patterns, liner companies will put their houses back in order. Empty equipment shortages will be solved and operated capacity will be allocated more efficiently to service demand. Put another way: this is not the late 2000s, and the industry does not fundamentally lack the ships and equipment needed to transport the prevailing level of container trade.

Ad hoc vessel requirements, above all on the transpacific, will reduce once the current demand wave crests before Chinese New Year, thereby releasing capacity for deployment elsewhere. Container demand, although posting strong year-on-year growth rates against a peak lockdown point of comparison, will subsequently soften in the space between the turbocharged restocking of the fourth quarter of 2020 and a post-vaccine economic rebound; and more generally vessels will suffer fewer delays in ports.

The larger end of the liquid time-charter market in particular will see greater available capacity compared with 2020, due to fewer vessels tied up with scrubber retrofits. None of this is likely to exert much downward pressure before the end of the first quarter of next year, however.

We expect the vessel time-charter market will experience a correction in the second quarter of next year as these factors combine, although the timing here remains considerably uncertain. The correction, we believe, will return vessel earnings to levels that are generally healthy by the standards of recent years, and there is scope for renewed improvement thereafter.

This is a guest post by Daniel Richards, senior analyst at Maritime Strategies International