Transportation & Logistics Analysis

Second half scenarios for the container shipping market

July 06 2021

The sharp rise in container shipping freight rates should peak in the summer but everything indicates that they will stabilise at high levels.

Last January, when we made our traditional start of the year forecasts, we came up with three hypotheses for the container shipping market in 2021:

  • A reversal of the balance of power in favour of shippers in the second half;
  • A continuation of the rising freight rate trend, driven by tight capacity control on the part of the shipping companies;
  • Political regulation in the form of occasional market intervention.

Now we are at the halfway point of the year, we propose refining these hypotheses, drawing the lessons from a first half which has been without precedent in the history of container shipping.

The lessons of the first half

1/ Self-perpetuating market tension

Thanks to blank sailings, equipment shortages and port congestion, widespread chaos has established itself on all markets to become the new norm. Prices have become totally disconnected from the services for which they are charged and the inflationary spiral affecting freight rates has spun out of control.

2/ Intermodal switching is more common but cannot meet all demand

The Silk Road rail routes are increasing their market share but still represent only 20 or so ships a year in terms of capacity. They represent a marginal solution, therefore, which has demonstrated that it has a role to play but is not a game changer.

3/ Exponential growth in Western demand keeps the bubble growing

To use a word which is currently in fashion, the "resilience" of American and European consumers has been a surprise in current pandemic conditions. As production to order becomes the general rule, higher prices and two- and even three-month delivery times do not seem to be discouraging the demand of consumers who are continuing to pay cash as they place their orders. This trend is new and is doubtless favoured by the development of e-commerce, which is durably transforming buying habits.

4/ There has been no large-scale switch to nearshoring

Even before the Covid-19 pandemic began, Western supply chain managers were starting to think about diversifying their sources and turning to nearshoring to reduce their dependence on China. The pandemic could have speeded up this trend but we can only conclude that this did not happen. China has remained the workshop of the world even if alternative sourcing is being developed on the margins. Despite the constant increase in raw material, China has remained unbeatable on price for most of the products we consume.

The figures speak for themselves. The trade deficit of the United States and Europe with China is continuing to grow despite political efforts to redress the balance.

5/ The post-Covid era is not yet in view

The prospect of a return to the world as it was before the pandemic is receding as new variants of the virus emerge and lockdowns are lifted and then re-imposed. In the absence of a global approach rather than one based on zones or hemispheres, it looks today to be impossible to bring the pandemic under control. Business needs to learn to live with this uncertainty.

Second half scenarios

Taking account of these realities, we propose revising the three scenarios we drew up for the container shipping market in January.

1/ A reversal of the balance of power

This scenario is looking increasingly unlikely, at least in the near term, partly because of the massive injection of liquidity into Western consumption as a means of avoiding social explosion and partly because of the absence of alternatives.

The announcement that the FAK rate for the transportation of a 40' container from Asia to Europe had reached USD20,000 represented a real-life stress test for our economies. At best, it is indicative of a temporary overheating of the economy. At worst, it is the precursor of a rapid slide into a much graver situation in the former of hyper-inflation leading to higher interest rates, the growth of public debt and the erosion of purchasing power.

This dark economic scenario needs to be taken seriously. It remains unlikely but the risk is not zero in a context of growing tension with China and a pandemic which is far from being under control.

2/ Shipping companies stay in control

This is today the most likely scenario for the second half. Although it is legitimate for the shipping companies to quietly go about earning their livings and financing the environmental and organisational challenges they face, particularly after decades of great difficulty, uncontrolled freight rate growth risks provoking reactions which will be difficult to control.

The shipping companies know that better than anyone and calls for moderation are being increasingly heard. The challenge for them now is to bring the market to a soft landing while keeping freight rates at a high level, which is to say with five-figure FAK rates for 40' containers on the major trading routes.

The exemplary discipline which has prevailed so far could break down, however, in the face of diverging interests between the Western camp and China.

  • For China, current freight rate levels and those announced for July are not good news. Certainly, the increase in transport prices has enabled state-controlled shipping group Cosco to improve its financial situation but the overheating of freight rates could reduce the competitiveness of the Chinese production sector in the second half. The point of alert seems to have already been reached. On the other hand, congestion in the greater Shenzhen zone has not yet been completely eliminated and the shortage of containers in southern China remains a fundamental problem. China's task now is to find a balance between the interests of its national transport operators and its economic growth objectives. It has all the cards it needs to do this.
  • The issues facing Western and Japanese shipping companies is radically different. They are tempted to test the market's upper freight rate limits.
We can reasonably consider that, in the course of the summer, we will see the end of the freight rate flare. To limit the inflationary freight rate trend, Cosco could opt for large-scale conversion of rates from FOB to CIF for traffic destined for Europe and the United States. The Korean companies could also be tempted to intervene with the objective of increasing their market share. Some have already made a name for themselves in the past by wrong-footing the market in this way.

3/ Political regulation

A regulatory reaction is always possible, particularly if the threats posed by hyper-inflation start to figure more prominently in the public debate. For the time being, however, there can be no escape from the fact that powerlessness predominates. The shipping companies' marketing policies are not coming under very close inspection by the regulatory authorities. Overall, therefore, this third scenario has lost credit over the first half.

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Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).