Insights on the Current Status of Liner Shipping Market
by Dr. Jia Dashan, Secretary-General of APSN

Nov 29, 2021

Question 1What specific characteristics this round of shipping rate surge has compared with past, especially the surge of the container shipping rate?

Answer: First, the context is different. This round of freight rate hike happened against a backdrop of economic and trade recovery. Generally, the shipping capacity adjustment usually take a relatively long time and could not catch up with the rising pace of demands, causing the market to change in favor of the supply side and driving up the shipping rates. Historically, the continuous and rapid growth of the economy and trade pushes the demands for shipping rise. The current round of rate increases occurred in the context of negative economic and trade growth in 2020 and recovery in 2021. In 2020, the world economy and trade recorded negative growth rates of 3.3% and 4.8%, respectively. In 2021, economic and trade growth is expected to stand at about 6% and 9%, respectively. Compared with 2019, the annual average economic and trade growth rates are 1.3% and 2.4%, respectively. Second, the jump is unexpected, and the level of the surge is record-breaking. Due to the COVID-19 pandemic, the shipping demand in 2020 was weak, resulting in a supply-demand imbalance. In the first half of 2020, China's demand for international container shipping dropped by 7%, while the supply increased steadily by about 3% during the same period, leading to a freight rate fall, and the SCFI hovered at a little higher than 800 points. The shipping industry was generally bearish, and shipping companies were also preparing to tighten their belts. In the second half of 2020, with China's effective control over the pandemic and the structural adjustment of demand from developed countries in Europe and the United States, China was the first on trade recover. In July 2020, China’s export container shipping resumed growth and recorded a growth rate of nearly 14% in the fourth quarter. The unexpected fast-growing demand quickly reversed the supply-demand relationship. Meanwhile, the impact of the pandemic has led to a decline in the supply chain turnover efficiency, which aggravated the supply-demand imbalance and has promoted the continuous increase of freight rates in the market. The SCFI was averaged at 2,374 points in December 2020, exceeded the industry’s expectation when standing at the first half of 2020. With the cumulative effect of the pandemic impact, the efficiency of all shipping sectors declined. Port congestion and the less efficient cargo collection, distribution, and transportation compromised the container transfer efficiency, making it hard to find containers or spaces. As the supply-demand imbalance intensified, the freight rate soared and kept hitting new highs. The SCFI reached 4,464 points at the end of September 2021.

Question 2: Global trade saw rapid growth in 2021. For example, China's foreign trade grew by more than 30%. What is the role of demand growth in driving up shipping rates?

Answer: Hit by the pandemic, global trade experienced negative growth in 2020, the world's shipping volume and container shipping volume fell by 3.4% and 0.7% during that period respectively. The global economy and trade recovered in 2021. However, the prices of all types of commodities went up in 2021 due to monetary policies, the actual shipping volumes did not rise by that big margin. Compared with 2020, the world's seaborne shipping volume and container shipping volume in 2021 are expected to increase by 4.5% and 6%, respectively, while compared with 2019, the annual growth rates will only be 0.5% and 3%, respectively, which will not be enough to become a main driver of the freight rate increase. Although China's foreign trade grew by 32.7% in the first three quarters of 2021, its seaborne foreign trade volume increased by about 5%, and its international containers rose by about 7%. As a result, the year-on-year average annual growth was 4.6 and 2.5%, respectively, compared with 2019.

Question 3: The above data show that the increases on demand and capacity supply are balanced. Does it mean that the logistics efficiency decline is the main factor which affected the effective capacity supply?

Answer: Yes. Compared with 2019, the world's container shipping demand grew by less than 6% in 2021, while the container shipping capacity rose by 7.5% during the same period. Shipping volume and capacity have generally maintained simultaneous growth, with shipping capacity increasing even slightly faster. Due to the impact of the pandemic, the container shipping efficiency of related sectors fell. For example, it became difficult for seafarers to change shifts, shortening the operating days of container ships, and some ships even stopped operations due to pandemic outbreaks. The lower port efficiency caused congestion, and lengthened the vessel cycle times. In particular, the average vessel dwell time of the Port of Long Beach and Port of Los Angeles is nine days or more. Due to the low logistics efficiency, the container circulation time extended, and empty containers failed to be returned in time. These factors reduced the effective capacity by about 14%, becoming the main reason for the freight rate increase.

Question 4: The pandemic reduced the effective shipping capacity. But why has the freight increased to so high?

Answer: The container shipping market includes long-term contract based shipping and spot rate based shipping. Due to the supply-demand imbalance, the long-term contract-based freight rate also went up, but the increase was limited, and the spot market was the biggest contributor. For the convenience of analysis, we assume that the market in 2019 is roughly balanced, with long-term contract based shipping and spot rate based shipping accounting for about 50% each, and the share of long-term contracts rises to 60% in 2021. However, due to the falling shipping efficiency, the actual effective capacity in the market declined by 14%. Compared with 2019, the overall capacity marked 12% shortage. As container shipping companies always have to set their long-term contracts as the first priority, thus the 12% shortage was concentrated in the spot market; that is, the spot market has turned from basically balanced to 29% undersupply. This undersupply was unprecedented, and the shortage of containers and spaces drove up the freight rates to new highs.

Question 5:  What are the reasons for the shortage of containers and spaces in China, and what are the current situations?

Answer: Look at China's international container shipping, the out-bound loaded containers is far more than in-bound ones. To maintain the balance, the liners must collect and return 3 million TEUs empty containers every month and complemented by new containers produced by domestic manufactureers relying on our container manufacturing capacity advantages. This balance had been maintained until June 2020. With the outbreaks of the COVID-19 pandemic, global trade suffered a setback. In 2020, China's international container shipping demands dropped by 8%. As China became the first country to effectively control the pandemic, much demands shifted to China. In the second half of the year, the export shipping demand gradually recovered and accelerated. In the fourth quarter of 2020, the growth was once as high as 14%. However, as the container circulation impeded, the returned containers increased by only 4%. Moreover, the China-Europe rail express cornered 150,000 TEUs of containers, aggravated the empty container supply. When the pandemic was at its peak, the shortage of empty containers reached 2 million TEU/voyages, it was hard to find containers. Given empty container shortage and rate hikes, China accelerated its container production, and the manufacturers' production stepped up to a historical high of 500,000 TEUs/month. Meanwhile, as returned empties grew, the container shortage situation is released in some degree, a new balance achieved with a longer circulation time. However, with the global trade recovery from the second half of 2020 to 2021, the shipping demand gradually recovered. The uneven increases in shipping demands, the poor logistics efficiency, and port congestion caused by the pandemic undermined the vessel circulation efficiency, which quickly reversed the supply-demand relationship in the market. The capacity strain quickly became prominent, especially in the spot market where even one space was rare. Given the nature of global container shipping, the space and container constrains are common not only in China but other places in the world. It is the root of the continuous rate surge.

Question 6: In view of the "bottleneck", what measures should be taken in the short or long term to alleviate the space shortage?

Answer: Under the stimulation of high freight rates, the liners have adopted various measures to increase effective supply in the short term, including adjusting the route layout and adapting to the uneven growth in the region. The recovery growth of container shipping is uneven. In 2021, the world's average growth rate was about 6%, and the growth of routes from Asia to North America was much stronger. Routes between China and North America increased more than 20%. Shipping companies adjusted more capacity to US from other lines, so that their route layout in response to market changes, including transferring the capacity from domestic market to ocean shipping . In 2021, container ships demolition dropped from 200,000 TEUs/year before the pandemic to less than 20,000 TEUs/year, and the average age of demolition was extended from 24 years to 27. The idle capacity was also reduced from 4% before the pandemic to 0.8%. They also increased the vessel speed and loading rate to speed up vessel circulation to increase the effective capacity. Meanwhile, the collaboration between liners and shippers was strengthened to increase the share of long-term contracts and the market predictability for both sides improved. As pandemic prevention and control become normalized, shipping companies, terminals, shippers, and other stakeholders should strengthen communication and coordination, improve information sharing, and improve efficiency. In terms of seafarer and dockworker rotation shifts and vaccinations, we should increase coordination to ensure the stable and smooth operations of the supply chain. In response to the severe congestion in the U.S. ports, the Biden administration has asked ports of the United States should operate on a 24/7 schedule, especially Port of Long Beach and Port of Los Angeles which may speed up the cargo movement. In the long run, first, more effective anti-pandemic measures are still imperative to balance efficiency and effectiveness. All nodes on the supply chain need further communication and comprehensive cooperation to reduce congestion and release the suppressed capacity. Second, new ships should be built to alleviate the space shortage. Infrastructure and transport connections should be enhanced to maintain moderate oversupply and improve the resilience.

Question 7: Regarding of new buildings, we have seen a substantial increase in new ship orders. Does it mean that the relationship between supply and demand will improve? How do you look at the liner market in 2022?

Answer: From the perspective of capacity development and new shipbuilding, shipowners will increase their investment in shipbuilding as the market experiences a gradual boom. The orders from the last shipping peak in 2007 accounted for a crazily high share of 60% of the existing capacity. This round of freight rate hikes also stimulated shipowners to augment investment in shipbuilding. Although the freight rates this time were much higher than those in the last peak, the capacity share of orders placed in September 2021 increased to 22% of the existing fleet. This figure is relatively reasonable. The new orders will be delivered in 2023 and 2024. Given the average annual growth rate of 3% in capacity and the average annual dismantled capacity of 3%, the relationship between shipping capacity and shipping volume remained basically unchanged, which won't have a major impact on the supply-demand relationship. Whether the supply-demand relationship can be changed depends on whether the efficiency of each link recover. Even if the supply-demand relationship can recover to the 2019 level, the freight rates may be hard to return to the 2016-19 level due to the increasing costs of various factors. As the pandemic and the application of various measures become a normal phenomenon, the vessel circulation efficiency will improve to a certain extent, and the space constrains may be alleviated. As a result, the spot rates may drop to a certain degree, the share and rates of long-term contracts will go up, and the overall freight rates will still stand at a high level.


Source: APSN