Drewry paints positive outlook for ocean freight rates

Spot and contract rates are on course to rise by a combined 7% in 2019, as the modest recovery continues, says Drewry. With carriers expected to keep a lid on supply additions, whether through demolitions, slippages or slow steaming, they should will be able to raise rates even amid slower demand growth.

News ID: 80343

Date: 06 February 2019 - 08:24

Drewry says, however, that rate sentiment could soon be dampened if the US-China trade war takes a turn for the worse

OCEAN freight rates are expected to achieve respectable gains in 2019 despite significant supply-side pressures and a decelerating demand environment, according to Drewry.

The London-based analyst paints a positive outlook for the freight market for the year, with liner operators armed with both better contract rates and an upward moving spot market compared with last year, particularly towards the end of the year when the International Maritime Organization’s low-sulphur regulations come into effect.

Drewry says that it expects the modest recovery in ocean freight rates last year to continue, with spot and contract rates rising annually by a combined 6.5% in 2019. This follows on from an increase of around 2.5% the previous year.

“Last year was a backward step for carriers in terms of bridging the supply/demand gap as fleet growth exceeded port throughout for the first time since 2015, yet carriers still managed to slightly improve rates,” according to Simon Heaney, senior manager for container research.

“In 2019, we expect supply growth to once again fall behind that of demand, even with a softening in world throughput growth down to around 4%.”

Carriers will once again be braced with significant newbuilding tonnage, which Drewry currently projects at around 1m teu, including a host of ultra large containerships above 18,000 teu.

The major concern is for the Asia-Europe trade — the natural home for these units, which is currently experiencing a low growth phase, even with slightly more optimistic demand forecasts for the year.

“Whilst challenging, it should be remembered that carriers have faced this scenario for a number of years and are now fairly adept at managing capacity on key routes,” says Mr Heaney.

Moreover, he says it is highly unlikely that all these mega ships currently scheduled will arrive as planned, with Drewry anticipating carriers to defer a number of vessels to next year and beyond to suit capacity requirements.

“Underworked ship yards too are also not in a particularly strong position to resist, and are more likely to welcome slippages if it keeps underworked staff utilised for longer,” adds Mr Heaney.

He says that despite the numerous challenges facing carriers ahead of the sulphur cap, it too will help limit supply growth as it will prompt owners to carry out far more demolitions they look to be rid of uneconomical ships.

Scrubber retrofits to comply with regulation, although minimal in terms of the overall fleet, will also help to alleviate supply side pressures at least for a period, with around 220 ships due to be taken out of service for up to six weeks in 2019.

“This has the potential to boost utilisation to a small degree and freight rates,” says Mr Heaney.

Slow steaming

Another method adopted by carriers to keep a lid on the influx of supply is slow steaming, a practice Mr Heaney expects to continue.

Carrier alliance 2M, comprising the two largest carriers Maersk Line and Mediterranean Shipping Co, announced recently that it would slow down ships on its Asia-Europe services from the start of March. Drewry says others will likely follow its lead.

Positives for forward freight rate projections can also be found in recent spot market development.

The Drewry-assessed World Container Index currently shows spot rates on the respective Asia-Europe and transpacific trades about $500 per feu higher than at this time last year.

Drewry’s director of research products, Martin Dixon, says: “The spot market is significantly elevated currently compared to where it was at the same stage in both 2017 and early 2018, which provides a much higher platform to start annual contract negotiations.”

Although the late 2018 recovery in spot rates came too late for the Asia-Europe trade, where contracting typically takes effect from January, this development will likely aid annual contract negotiations on the transpacific, due for renewal in May.

Drewry says that it estimates that contract rates on the westbound Asia-Europe trade were accrued at broadly similar levels to the previous year at around $1,000 per feu. However, on the eastbound transpacific trade it anticipates a small uplift in contract rates in light of recent spot rate developments.

The wild card that could change everything, however, is the outcome of the trade war between the US and China.

According to Mr Heaney, while materially this did not impact too heavily on containerised traffic last year in terms of applied extra tariffs, as the first round of tariffed products were largely shipped by other modes, it did alter trade flows. Transpacific traders brought forward shipments in the latter stages of 2018 so as not to incur additional tariffs proposed for January 1, 2019, despite being pushed back as the US and China resumed negotiations.

“If the current talks bring home no resolution and additional tariffs are applied from March 1 there will likely be a repeat scenario of last year, potentially creating capacity shortages leading to higher spot and contract rates,” he says.

Spiralling fuel costs

Aside from tariffs the other major factor on carriers’ minds will be fuel.

Last year, spiralling fuel costs had a major impact on the liner industry’s bottom line.

Bunker prices did however tail off in the latter months of the year, and in the early part of 2019 have been on a steep upward curve, bringing prices in line with this time last year.

Drewry says that it does not foresee any sharp increase in fuel costs this year as in 2018, or at least until the final quarter of the year, as carriers switch to low-sulphur fuel equivalents ahead of IMO regulation.

Spot and contract rates are on course to rise by a combined 7% in 2019, as the modest recovery continues, says Drewry. With carriers expected to keep a lid on supply additions, whether through demolitions, slippages or slow steaming, they should will be able to raise rates even amid slower demand growth.

Drewry says, however, that rate sentiment could soon be dampened if the US-China trade war takes a turn for the worse

DREWRY SAYS THAT IT EXPECTS THE MODEST RECOVERY IN OCEAN FREIGHT RATES LAST YEAR TO CONTINUE.

OCEAN freight rates are expected to achieve respectable gains in 2019 despite significant supply-side pressures and a decelerating demand environment, according to Drewry.

The London-based analyst paints a positive outlook for the freight market for the year, with liner operators armed with both better contract rates and an upward moving spot market compared with last year, particularly towards the end of the year when the International Maritime Organization’s low-sulphur regulations come into effect.

Drewry says that it expects the modest recovery in ocean freight rates last year to continue, with spot and contract rates rising annually by a combined 6.5% in 2019. This follows on from an increase of around 2.5% the previous year.

“Last year was a backward step for carriers in terms of bridging the supply/demand gap as fleet growth exceeded port throughout for the first time since 2015, yet carriers still managed to slightly improve rates,” according to Simon Heaney, senior manager for container research.

“In 2019, we expect supply growth to once again fall behind that of demand, even with a softening in world throughput growth down to around 4%.”

Carriers will once again be braced with significant newbuilding tonnage, which Drewry currently projects at around 1m teu, including a host of ultra large containerships above 18,000 teu.

The major concern is for the Asia-Europe trade — the natural home for these units, which is currently experiencing a low growth phase, even with slightly more optimistic demand forecasts for the year.

“Whilst challenging, it should be remembered that carriers have faced this scenario for a number of years and are now fairly adept at managing capacity on key routes,” says Mr Heaney.

Moreover, he says it is highly unlikely that all these mega ships currently scheduled will arrive as planned, with Drewry anticipating carriers to defer a number of vessels to next year and beyond to suit capacity requirements.

“Underworked ship yards too are also not in a particularly strong position to resist, and are more likely to welcome slippages if it keeps underworked staff utilised for longer,” adds Mr Heaney.

He says that despite the numerous challenges facing carriers ahead of the sulphur cap, it too will help limit supply growth as it will prompt owners to carry out far more demolitions they look to be rid of uneconomical ships.

Scrubber retrofits to comply with regulation, although minimal in terms of the overall fleet, will also help to alleviate supply side pressures at least for a period, with around 220 ships due to be taken out of service for up to six weeks in 2019.

“This has the potential to boost utilisation to a small degree and freight rates,” says Mr Heaney.

Slow steaming

Another method adopted by carriers to keep a lid on the influx of supply is slow steaming, a practice Mr Heaney expects to continue.

Carrier alliance 2M, comprising the two largest carriers Maersk Line and Mediterranean Shipping Co, announced recently that it would slow down ships on its Asia-Europe services from the start of March. Drewry says others will likely follow its lead.

Positives for forward freight rate projections can also be found in recent spot market development.

The Drewry-assessed World Container Index currently shows spot rates on the respective Asia-Europe and transpacific trades about $500 per feu higher than at this time last year.

Drewry’s director of research products, Martin Dixon, says: “The spot market is significantly elevated currently compared to where it was at the same stage in both 2017 and early 2018, which provides a much higher platform to start annual contract negotiations.”

Although the late 2018 recovery in spot rates came too late for the Asia-Europe trade, where contracting typically takes effect from January, this development will likely aid annual contract negotiations on the transpacific, due for renewal in May.

Drewry says that it estimates that contract rates on the westbound Asia-Europe trade were accrued at broadly similar levels to the previous year at around $1,000 per feu. However, on the eastbound transpacific trade it anticipates a small uplift in contract rates in light of recent spot rate developments.

The wild card that could change everything, however, is the outcome of the trade war between the US and China.

According to Mr Heaney, while materially this did not impact too heavily on containerised traffic last year in terms of applied extra tariffs, as the first round of tariffed products were largely shipped by other modes, it did alter trade flows. Transpacific traders brought forward shipments in the latter stages of 2018 so as not to incur additional tariffs proposed for January 1, 2019, despite being pushed back as the US and China resumed negotiations.

“If the current talks bring home no resolution and additional tariffs are applied from March 1 there will likely be a repeat scenario of last year, potentially creating capacity shortages leading to higher spot and contract rates,” he says.

Spiralling fuel costs

Aside from tariffs the other major factor on carriers’ minds will be fuel.

Last year, spiralling fuel costs had a major impact on the liner industry’s bottom line.

Bunker prices did however tail off in the latter months of the year, and in the early part of 2019 have been on a steep upward curve, bringing prices in line with this time last year.

Drewry says that it does not foresee any sharp increase in fuel costs this year as in 2018, or at least until the final quarter of the year, as carriers switch to low-sulphur fuel equivalents ahead of IMO regulation.