Container freight rates on the major East-West trades are on the rise, but with first quarter volumes decimated and demand under threat as coronavirus shuts down Europe and the US, lines face an upward battle through 2020.
A.P. Moller–Maersk (Maersk) suspended its guidance for 2020 on Friday (20 March), citing “material uncertainties and lack of visibility related to the global demand for container transport” due to the impact of the global Covid-19 pandemic on global transport markets and supply chains.
This followed Hapag Lloyd’s announcement the previous day that it expects profit forecasts this year to be “subject to considerably higher uncertainties than normal, particularly due to the coronavirus outbreak”, with earnings expected to be impacted “at least in the first half of 2020”.
Hapag Lloyd also blanked more further transpacific services citing low demand, adding that further transport capacity deployments “may have to be adjusted in light of the coronavirus in the coming months to cope with lower demand”.
However, short-term respite is at hand for lines in the form of operational cost reductions and higher freight rates
Cost cuts: IMO 2020 and crew
Sources tell Lloyd’s Loading List that one unexpected – and unwanted – cost saving as a result of Covid-19 for many lines and other shipping companies is the inability to make expensive crew changes. In short, seafarers are now banned from disembarking in many countries including most of Europe due to coronavirus fears even as they keep global supply chains open.
More substantially for lines, the price war between Russia and Saudi Arabia has seen oil and bunker prices collapse, taking a major chunk out of liner operational costs.
While shippers will benefit from lower fuel prices eventually, during the opening months of the year most have been tied to bunker surcharge indexes based on recent – but far higher - fuel prices. The differential between charges levied on shippers and the real cost of fuel has bolstered liner revenues even as volumes have slumped.
Maersk: profits up; volumes down
Maersk now expects Q1 2020 Ebitda before restructuring and integration costs to be around $1.4bn, up from $1.24 billion a year ago.
Søren Skou, CEO of Maersk, said that during the first two and a half months of 2020 the world’s largest container line had “executed well on our IMO2020 strategy for how to manage the extra cost involved with the IMO mandated switch to low-sulphur fuel oil from January 1st".
He added: “We have effectively mitigated a part of the extra cost through good procurement, blending and manufacturing fuel ourselves and we have implemented rate increases to recover the actual fuel price increase from customers.
“We consequently expect to deliver a Q1 2020 which is better than Q1 2019, despite declining volumes across our businesses, driven by the COVID-19 pandemic.”
Freight rates surge
Freight rates on major trades are also now gathering momentum on increased export volumes available in China and ongoing capacity cuts by carriers.
In the week ending 19 March, Drewry’s World Container index was up 6.8% to $1,584.77 per 40ft container (FEU) and 22.5% up compared to the same period last year.
The transpacific saw the most substantial weekly gains with Shanghai-Los Angeles rates surging 22% week-on-week and now up 16% year-on-year. Shanghai-New York rates climbed 7% week-on-week and are now 21% higher than a year ago.
On the European trades, Shanghai-Genoa freight rates were up 4% week-on-week on 19 March and are now up 42% compared to a year ago. Shanghai-Rotterdam rates dropped 1% over the week, but remain 20% higher year-on-year.
Headwinds set to continue
However, all stakeholders in the container shipping markets will continue to face unprecedented headwinds in the coming weeks and months as coronavirus wreaks economic and supply chain havoc.
As reported in Lloyd’s Loading List, Sea-Intelligence believes container shipping could soon be facing a demand scenario similar to the financial crisis of 2009, with a potential volume loss of 10% – equal to 17 million TEU globally – a serious threat.
Peter Sand, BIMCO’s chief shipping analyst, also expects lines to have a tough year once short-term restocking has been completed.
“Inventories are running low, supply chains and retailers need to stock up intermediate and finished goods, and with the Chinese manufacturing industry recovering, container volumes will start to pick up,” he said.
“However, in the coming months, the growth of container volumes could start to stagnate or even decline, as consumer confidence deteriorates across advanced economies.”