Ocean freight and idle rates ‘have peaked’

7/23/2020

Logistics investment analyst Jefferies expects container shipping freight rates and container line margins will increasingly come under downwards pressure in the second half of this year following the surprisingly resilient ocean freight prices in the second quarter (Q2) and first half (H1) of 2020, with idle container ship capacity being redeployed as demand recovers and fuel prices having bottomed out.

After major lines Maersk and Hapag Lloyd provided preliminary guidance indicating better-than-expected results in the second quarter (Q2) and first half (H1) of 2020, given the drop in demand due to the Covid-19 pandemic, Jefferies indicated that it did not expect such a strong performance by lines in the second half of the year – although it believes lines’ financial performances would still be significantly better for the year as a whole than most analysts had anticipated.

With Hapag Lloyd reporting that it expects its first-half 2020 EBITDA performance to be up by around 20% compared with last year, “in line with Maersk, after a better than expected recovery in 2Q20”, Jefferies said it had increased its full-year expected (FY20E) EBITDA by 10%, “assuming the 1H20 increase will be offset by increasing margin pressure in 2H20, after container freight rates and idle capacity rates have likely peaked, while bunker prices have bottomed”. In terms of their respective investment potential compared with their current share prices, it added: “We remain relatively cautious, with a Hold rating on Maersk and Underperform rating on Hapag Lloyd.”

Commenting on the continuing resilience of container freight rates, Jefferies noted: “The CCFI is 7% higher on average so far this year, while the SCFI is 14% higher, after a 22% rally recently, driven by three general rate increases on the transpacific in June, whereas rates elsewhere remained relatively stable. The resilient freight rates reflect better than expected capacity management, which led to a surge in the idle rate, offsetting lower demand. However, we expect freight rates will increasingly come under pressure, with idle capacity being redeployed as demand recovers.”

Bunker prices bottom

But it also noted that bunker prices had now bottomed, observing: “Bunker prices have strongly recovered, with HSFO now at $267/ton, 34% above the 2Q20 average, and LSFO at $322/ton, 25% above the 2Q20 average. There will likely be some delay before higher bunker prices will be offset through bunker surcharges in fixed-price contracts.”

Meanwhile, on supply, it said: “The risk of an oversupplied container market remains high in our view, with active capacity estimated to decrease by 2% this year, after an estimated 5% points higher idle rate at 8%, compared to an expected high-single digit contraction in container demand.” Looking at some regional indicators, it noted that visibility on North-South and Intra-regional trades remains limited to just over 50% of volume, with Latam trades “expected to be increasingly affected by Covid-19”.

Recovery in 2021

Looking ahead to 2021, Jefferies said it did not expect to see a full recovery of markets next year, noting: “For FY21E, an anticipated high-single-digit recovery in container demand is unlikely to be V-shaped, due to growing protectionism, reigniting trade tensions and near-shoring of supply chains, and expected to be offset by the redeployment of idle capacity, resulting in a balanced container market at best.”

A source at Hapag Lloyd was more optimistic, but acknowledged that it was difficult to make predictions during a crisis. He said that in the second quarter, the line saw transport volume decline by 10% compared with the same period in 2019, adding: “Looking ahead, we have to be prepared for any situation that might develop. Hoping that the second wave won’t come is just not enough. 

“As for when the container sector will recover, we are still in the middle of the storm but we do see a positive trend in demand, which will hopefully continue through Q3. Being optimistic, we hope the volumes in 2021 will get close to our 2019 volumes.”

Spot rates stabilise

On the pricing side, the latest figures from Drewry indicate that container freight spot rates have stabilised on most main trades, but at a far higher price level than this time last year.

In its weekly World Container Index assessment, Drewry said the composite index of eight major east-west trades decreased overall by 1% last week to $2,002 per 40ft container but was 45.8% up when compared with same period of 2019. The average composite index of the WCI, assessed by Drewry for year-to-date, is $1,668 per 40ft container, which is $269 higher than the five-year average of $1,400 per 40ft container.

Spot rates from Shanghai to Rotterdam declined 3% or $59 last week to $1,806 for a 40ft box, although they are still up by 29% when compared with same period of 2019. Rates from Los Angeles to Shanghai and Shanghai to New York lost 1% to reach $513 and $3,447 respectively per feu, although Los Angeles to Shanghai prices are still up by 85% when compared with same period of 2019

Similarly, freight rates from Rotterdam to New York slipped by $113 or 5% to reach $2,213 for 40ft container, and Shanghai to Genoa dipped $88 or 4% to touch $1,978 per feu.

However, Rotterdam to Shanghai prices gained $15 and reached a level of $1,173, which is 103% above the level of the previous year. Conversely, rates from Shanghai to Los Angeles raised $39 to reach $2,932 and rates from New York to Rotterdam spiked 3% to $559.

Drewry said it expects rates to remain steady in the coming week.