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2021 August 16

From depth to heights: freight rates ‘went crazy’

Image source: MOL

The pandemic has severely affected the global seaborne shipping market and has ‘driven crazy’ the freight rates: contrasted with zero or even negative rates in the segment of oil tankers, container ships’ freight rates hit records and break the traditional logistics schemes while the cost of dry bulk cargo transportation reaches its decade high.

Tanker zeroing

The tanker segment is ‘in a fever’. After the pandemic began in the first half of 2019, spot freight rates for VLCC sank almost 7.5 times from about $150,000 per day to about $10,000 per day. Amid the OPEC+ agreements and the end of the first coronavirus wave, freight rates demonstrated a fast recovery to almost $180,000 per day but then they showed a steep fall to $5,000-$10,000 per day having finally sunk below zero.

The growth of crude oil prices played a dirty trick on shippers: after the surge of prices in November 2020 China reduced the purchase volume and started decreasing the reserves accumulated over the period of low prices. Therefore OPEC+ cuts were not of that much help for the related segment operators. In the tanker segment, the situation is aggravated by the growth of bunker prices. In these circumstances, some ship owners, such as Cosco and AMCL, prefer to suspend operation of ships with low fuel efficiency.

Albeit not as disastrous, the situation in the segment of oil product carriers is similar: freight rates have dropped several times after their peaks in 2020.
However, most analysts forecast a slow but steady recovery of the tanker market in view of oil prices stabilization, reduction of reserves and balancing of tonnage available in the market. Anyway, those having diversified their businesses through introduction of industrial projects are at an advantage as we told earlier >>>>

Falling hurts after flying high?

The situation is exactly the opposite in the segment of dry bulk cargo ships and especially in the segment of container ships. From autumn 2020, the China Containerized Freight Index (CCFI) surged over four-fold on the China to Europe trade and about 2-2.5 times on the China to America trade. As Sultan Ahmed Bin Sulayem, Group Chairman and CEO of DP World, told IAA PortNews at the Arctic Day conference, the recent surge of freight rates increased the cost of container shipping five-six times (CCFI does not cover the entire world situation). Besides, enormous volumes of cargo waiting for shipping have accumulated due to the pandemic, he said.

According to the latest Long-Term XSI® Public Indices from Xeneta – which crowd sources real-time rates data from leading shippers – the global index recorded a staggering jump of 28.1%, blowing the previous record (a 11.3% rise in May 2019) out the water. The benchmark now stands 78.2% higher than in July 2020.

Image source: MOL report

“This is a truly breath-taking development,” comments Patrik Berglund, CEO of Oslo-based Xeneta. “We’ve seen a combination of high demand, under capacity and supply chain disruption (in part down to COVID and port congestion) driving rates ever higher this year, but nobody could have anticipated a hike of this magnitude. The industry is in overdrive. “Reports suggest that more than 300 vessels have already been ordered this year to try and redress the balance. However, these obviously won’t come on line for some time, so it’s difficult to see – unless something radical transpires – any relief on the immediate horizon for the shipper community. Quite frankly, I’ve never seen anything like it.” 

The XSI® delivers unique market intelligence to help stakeholders understand the market and get optimal value for their businesses in contract negotiations. In July it revealed unprecedented shifts, with rates in Europe leading the way. The import benchmark here spiked by a massive 49.1% driving prices to an all-time high (the spot market set the course for the jump, with Freight All Kind, FAK, rates surpassing USD 13,000 per FEU). Imports now stand a towering 120.3% up year-on-year. Exports also recorded their largest ever monthly increase, although by a more ‘modest’ 16% (up 39.8% since July 2020).

According to Xeneta, the Far East indices followed suit, with a record breaking 24.2% rise in exports (110.4% up year-on-year) while imports edged up, relatively speaking, by a still impressive 7.3% (43.2% higher than in July 2020). In the US, the XSI® revealed a 17.7% surge in imports – representing another all-time high – taking the benchmark to 61.2% above July last year. Exports also demonstrated strong gains, with an 11.1% climb (up 12% year-on-year, but 18.4% since the start of 2021).

Xeneta points to a glut of newbuild orders from key shipping lines scrambling to meet demand and secure market share – with, amongst others, COSCO believed to be have contracted 10 containerships, ranging from 14,092 TEU to 16,180 TEU, and Yang Ming understood to be mulling 24,000 TEU vessels.

“It’ll be interesting to see how established players react to the red-hot market. Fortuitously, Evergreen ordered a dozen 24,000 TEU vessels back in 2019 and some will touch down this year, eventually boosting the firm’s capacity by 18%. There’s also word that Taiwanese carrier Wan Hai may re-enter European trades with its smaller vessels to take advantage of attractive rates. So, changes are on the horizon, but how significant will they will be in terms of the overall picture?”, said Patrik Berglund adding that “for the time being carriers have the fundamentals firmly in their favor and are enjoying time in the sun, as illustrated by recent earnings reports from major players such as from Maersk and Hapag Lloyd.”

The surge of seaborne freight rates affected the traditional logistics schemes which could not but affect logistic chains crossing Russia as we wrote earlier >>>>

As for the segment dry bulkers, it also sees the growth of freight rates although not as rapid as in the container segment. After its fall in the first half of 2020, Baltic Dry Index (BDI) recovered its decade high level and exceeded 3,000 points. Freight rates for Capesize ships exceeded their maximum of 2014, Panamax, Handymax and Handysize freight rates hit their decade-old records having reached $28,000 -$30,000 per day.

The growth freight rates in the segment of dry bulkers is driven by the demand for ore and grain after coronavirus related lockdowns (deferred demand just like in container cargo segment), record high prices backed by high supply (mostly from Brasilia and Australia).

In our opinion, sharp increase of dry cargo transportation costs may also  result in a steep fall in the future: the pent-up demand will be satisfied while the additionally introduced tonnage will lead to an excess supply.

By Vitaly Chernov

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