Ocean freight recovering faster than expected

Container markets will likely continue to bounce back through the third and fourth quarters of this year and return to 2019 levels next year as the recovery from Covid-19 lockdowns continues, according to Rolf Habben Jansen, CEO of Hapag-Lloyd. 

The Germany-based container line, now the world’s fifth-largest container line by capacity, saw second-quarter profits surge on higher freight volumes and lower fuel costs despite reporting year-on-year volume declines.

Speaking in a Q&A webinar earlier this week, Habben Jansen said carriers had benefitted from demand recovering quicker than idled capacity could be reintroduced.

“It was not quite as bad as we expected or feared,” he said. “We saw a very sharp decline in volumes, especially in April and May. But we have seen quite a decent recovery when we look at the last six to eight weeks. Volumes are probably stronger than we all expected.”

Trade upgrades

Hapag-Lloyd has had to rapidly upgrade its container trade volume forecasts for 2020 from the “double-digit percentage” declines expected just a few months ago. “I wouldn’t be surprised if, in the end, we come out a little bit better than -7.2% [compared to 2019] and end up around about -5% or something like that.”

He said the supply-demand capacity balance was now favorable for lines, with the order book to fleet ratio down to 9%, its lowest level for more than a decade. And, he said the idled fleet has also fallen rapidly from its peak in May when around 2.7m TEU were laid up, to around 5.1% of the world fleet, or 1.2m TEU in capacity terms.

“I would think it’s probably going to go down even further,” added Habben Jansen. “So that means we’re getting back to a pretty much normal level, as there will always be some ships idle – either because they are just waiting for the voyage or because it’s small tonnage, of which there is plenty, or because they are in dry dock or undergoing, for example, a retrofit.

“I think we’re getting to a fairly normal situation, probably sooner than many of us expected. We’ve been seeing over the last six to eight weeks that we’ve had to scale back up again quite quickly in response to quite an unexpected and strong recovery in demand.”

Trans-Pac soaring on retailer resilience

He said the recovery in demand had been particularly robust on the trans-Pacific, where rates have been surging to record levels, and on the Asia-Europe front haul trade where rates have also been rising, albeit, less dramatically.

He said US retailer demand had been “remarkably” resilient and this had been reflected in the latest quarterly results of the largest retailers. “Their outlooks for Q3 and Q4 remain fairly optimistic, which seems to indicate that the likelihood that things will be falling off a cliff over the upcoming weeks or months is probably a lot lower than many had feared some time ago,” he added.

Outlook 2021

As for how 2021 develops, Habben Jansen was not overly optimistic. “I remain a little bit cautious there because it is very difficult to envision,” he said. “If we look at the number of [coronavirus] cases that we still see globally around the world and we see also how certain sectors have been hit, then I think it’s quite unlikely that this will not effect the global economy – even if today we see quite a lot of support through government programs. Those in many cases will run out.

So, I personally plan with a volume in 2021 which is probably around what we saw in 2019, which is probably a tad better than what most of the experts say these days.”

Second-half recovery

As reported earlier this week, analysis by Sea-Intelligence suggests that global ocean freight volumes may return to year-on-year growth in August and September, with the improving demand outlook for the second half of the year also expected to lead to higher profits for container lines compared with last year. Sea-Intelligence’s forecasts use modeling to predict medium-term global ocean freight volume changes, using the planned capacity supply or service cancellations of carriers as an indicator of the underlying volume developments – The methodology that it claims has closely tracked actual volume developments, “as seen during the pandemic from February to June”.

Its method indicates that although global container volumes are expected to show a decline in July, year over year (Y/Y), “we are looking at a prospective Y/Y growth in August and September. For the entire third quarter, we expect a Y/Y demand contraction, but by a marginal -0.1%, pulled down by the developments in July,” Sea-Intelligence said.

Alan Murphy, CEO of Sea-Intelligence, commented: “While this may seem counter-intuitive in a pandemic, there are some factors that we believe are at play here. First is a shift in consumption patterns away from services to physical goods, which would give rise to a need for stockpiling a large volume of goods different to what were previously sold. Second, restrictions on traveling and regular outings would potentially fund a higher spending on consumer products. Lastly, a change in working conditions necessitating a work-from-home approach has also driven consumer behavior towards purchases for furnishing home offices.”

Although there are no reliable global figures yet for overall container market volume developments in July and August, anecdotal reports indicate that the transpacific market has returned to volume growth since June or July. A representative of one container line last week told Lloyd’s Loading List: “We have started to bring ships back to the market since the US demand began to pick up, and our transpacific capacity since June has represented a year-on-year growth.

Alpha liner said carriers were already reinstating previously blanked sailings on the transpacific market but had still managed to hold rates firm. Spot rates on the North China to US west coast trade have surged to a historic high – about 120% higher than the year-ago level – despite the capacity restoration, according to the consultancy.

“The combination of higher rates and neutral or expanded capacity indicates strong consumer demand, with Chinese exporters wanting to ship as much product as possible before a potential second coronavirus wave,” it said.

Tan Hua Joo, an independent market analyst, said the current bullishness on the transpacific market was entirely driven by demand. “The strong demand, which will continue until at least September, has been driven mainly by the US stimulus bill and – to a smaller extent – by some front loading for the August deadline for tariff exclusion for certain goods,” said Tan.

But in his view, the return of transpacific market capacity to its normal seasonal level didn’t happen until July. “Capacity year-on-year only became positive in late July after it became clear that demand is stronger than market expectations and the blanked sailing programs have almost all been reversed on both the US west coast and east coast, based on data that I have collected,” Tan noted

Ref: www.lloydsloadinglist.com/

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