Box lines face discipline dilemma as outlook improves

News ID: 80512

Date: 15 July 2020 - 15:07

Carrier capacity management has held up freight rates despite a massive slump in demand. But as signs emerge of increased demand, lines will face pricing pressure as they return supply to the market.

As recovery scenarios begin to emerge, container carriers will face a tricky balancing act between returning supply and maintaining rates

Carriers face a balancing act between adding supply and maintaining rates.

CONTAINER lines will come under pressure to maintain pricing discipline as demand returns to the market in the latter part of this year.

But capacity management would be tied to the perceived threat levels from the pandemic, according to Drewry analyst Simon Heaney.

“I think that as long as the virus is an existential risk it is something carriers will keep a close watch on,” he said.

“The key for them is to maintain freight rate levels. They will introduce capacity as we start to see some tentative signs of recovery and they will correct wherever possible.”

Speaking in a webinar presenting Drewry’s latest outlook forecast for the sector, Mr Heaney said carriers would take a gradual approach to returning capacity to the market.

“They will dip into the charter market on short-term durations so they can have a rapid response in terms of withdrawing and adding supply as and when it is needed,” he said.

“We suspect that during the second half of the year there will be some loosening of discipline as capacity is brought back into the market,” Mr Heaney said.

“Our forecasts for freight rates and profitability are heavily tied to the trajectory of the pandemic, but a bigger influence on them will be whether carriers can hold on to historically elusive capacity and pricing discipline.”

Nevertheless, while recent merger and acquisition activity and market concentration had better enabled lines to manage capacity and enforce commercial discipline, Drewry expects their grip on the market to slip as traffic returns.

“Maintaining the balancing act between capacity deployment and cargo demand will become tougher to sustain as focus switches from chasing to chasing returning volumes and a threat to survival recedes.”

Drewry has reversed the gloomier forecast it made in March that predicted a steep fall in rates, but still thinks rates will soften in the second half of the year.

“We think that through the second half of the year rates may soften,” said Drewry research Martin Dixon.

“We are therefore projecting that there will be a moderate increase in blended global spot and contract rates of around 3% instead of the much sharper decline that we predicted back in our March forecasts of 6% declines.”

Moreover, signs that carriers were managing to perform well during the second quarter had led it to revise the sector’s earlier forecast of a $6bn loss to a $9bn operating profit for the year.

“We did not think carriers would be able to reduce costs beyond the sales decline, but we clearly underestimated their survival instincts,” Mr Dixon said.

Drewry has forecast a baseline scenario that sees port throughput volumes declining by 7.3% in 2020, the worst performance since the global financial crisis in 2009.

The base forecast has the second quarter as the bottom of the market, with global throughput for the period predicted to crashed by about 16%.

“Our assumption is that activity will improve through the second half of the year as lockdowns are lifted and stimulus packages kick in, but the quarterly year-on-year growth rates are going to remain negative until at least the beginning of next year as the world adjusts to the new rules of living that we are all getting used to.”

Drewry expects activity to rebound strongly in 2021 with a 10% increase in volumes, putting port handling back to the same levels as it was in 2019.

“Assuming the economic inputs from the likes of the IMF are correct, we would expect to see a modest upward curve over the remainder of the forecast horizon to 2024, with a compound annual growth rate of 3.5%,” Mr Heaney said.

But he warned that the confidence levels of in the forecasts were low due to uncertainty over the development of the pandemic.

“If there is a failure to contain the virus this year or a fresh outbreak next year, then you will quickly see the forecast for next year slip into negative territory.”