Container shipping divide: Cargo rates weaken, ship rents ‘robust’

Everyone knew the container shipping boom would end — it was a one-off spike driven by a pandemic and government stimulus, not a permanent change in fundamentals. But no one knew how container shipping markets would play out after the boom.

The consensus soon after the market peaked was that consumer demand would sink after stimulus was withdrawn and the U.S. would enter a recession. The liner industry would then reduce capacity to match lower demand by “blanking” (canceling) sailings, stabilizing spot rates above breakeven and supporting profitable contract rates.

Shipping lines would swiftly scrap older tonnage and decline to renew existing leases, replacing older leased vessels with more fuel-efficient newbuildings.

The initial consensus was that the ship lessors — otherwise known as non-operating owners (NOOs) — would have downside protection from multiyear leases extending through 2023 and 2024, but would face much weaker demand for ships that came off charter. Charter rates would follow freight rates down and NOO fleets would be increasingly idled by lack of liner interest.

The container shipping downturn continues to defy this script.

Ocean carriers are managing the decline more poorly than expected as they compete for market share. NOOs are surprising to the upside.

How markets differ from expectations

U.S. imports have reverted to pre-pandemic patterns even though U.S. retail spending is still high. The country has yet to enter a recession. In May, seasonally adjusted retail sales excluding vehicles, automotive parts and gasoline-station sales were up 37% versus May 2019, pre-pandemic (including the effect of inflation).

“Economists and shipping lines increasingly wonder why the decline in container import demand is so much at odds with continuous growth in consumer demand,” said Ben Hackett, founder of consultancy Hackett Associates.

The most common view is that import demand is temporarily at odds with consumer demand due to bloated inventories caused by the “bullwhip effect.” Opinions diverge on when the inventory overhang will clear and how long consumer demand will hold up.

Container lines have blanked sailings in response to reduced imports as expected, but not enough to offset lower import demand. Consequently, spot rates have fallen below breakeven in the trans-Pacific trade. Annual contract rates were renewed at sharply lower levels.

Ocean carriers are far from distress — they paid down their debt during the boom and hold historically high cash reserves — but net income is falling fast.

Meanwhile, liner demand for leased ships remains surprisingly resilient despite the drop in import demand. Charter rates fell from all-time highs as expected but have not followed freight rates all the way down.

Charter rates have stabilized, at least for now, at well above pre-pandemic levels. So, not only do NOOs have downside protection from their multiyear charters, they’re also booking fresh charters at profitable rates.

Freight rates continue to falter

Carriers have had some success lifting trans-Pacific spot rates off the floor with general rate increase (GRIs), but the GRI gains have not been “sticky.” Spot freight rates are down double digits year to date and remain under pressure.

According to the Freightos Baltic Daily Index (FBX), the China-West Coast spot rate fell 27% from June 6 through Friday, to $1,224 per forty-foot equivalent unit. The FBX China-East Coast spot assessment fell 14% over that period to $2,347 per FEU.

chart of container shipping trans-Pacific spot rates — Spot rate in USD per FEU. Blue line: China-West Coast. Green line: China-East Coast. (Chart: FreightWaves SONAR)

The Drewry World Container Index (WCI), which assesses weekly spot averages, shows the same pattern of brief GRI-induced spot rate gains followed by pullbacks. The WCI Shanghai-Los Angeles index fell 8% in the week ending Thursday versus the prior week, to $1,746 per FEU. The WCI Shanghai-New York index also fell 8% week on week, to $2,733 per FEU.

Platts reported Monday that the trans-Pacific freight market “softened further” in the prior week, “with market participants highlighting back-to-back reductions from some carriers in their offer levels.”

Linerlytica said Monday that “carriers continued to slash rates on the trans-Pacific routes.” It added, “The resolution of the ILWU [West Coast port labor] contract negotiations will further weaken the trans-Pacific rate outlook as the risk of any peak season disruption to cargo flows to the U.S. is materially reduced.

“Carriers need to reduce their capacity deployed to stop the rate collapse but their options are severely limited, with the influx of new tonnage gathering pace as new containership capacity delivered has reached a new record high of 256,000 TEUs [twenty-foot equivalent units] over the last four weeks compared to deletions of just 15,680 TEUs,” said Linerlytica.

Demand for chartered ships remains high

Rate sentiment is starkly different on the vessel chartering side of the equation.

The Harpex index, which measures charter rates for vessels from 700 to 8,500 TEUs in size, was at 1,238 points in the week ending Friday. That’s down 73% from the boom-inflated peak in March 2022. However, it’s up 17% from the recent low in February and up 2% year to date — and it’s double the index level at this time in 2019, pre-pandemic. The Harpex index has held steady since late April.

Ship brokerage Braemar said on Sunday: “The container charter market was robust [over the prior week], with a slight increase of reported fixtures as well as ongoing discussions taking place behind closed doors.”

Alphaliner reported on June 13: “There has been a lot happening behind closed doors, with multiple deals concluded in the larger sizes, including for newbuildings. This high activity is obviously supporting charter rates, which remain very healthy for big ships, particularly for longer periods.”

NOO-controlled tonnage would be increasingly idle if the downturn were following the predicted script. The reverse is happening.

Alphaliner reported that overall idle tonnage has been decreasing since March and was down to 3.4% of the global fleet. The vast majority of out-of-service vessels are ships in drydock or ships controlled by ocean carriers.

Only 16 NOO-controlled ships with aggregate capacity of 28,312 TEUs were commercially idle in Alphaliner’s latest survey. This is down 67% from 84,631 TEUs of commercially idled NOO-controlled tonnage in early February.

Container shipping stocks diverging

The diverging trends for freight rates, which directly affect container lines, and charter rates, which affect NOOs, are impacting stock pricing.

On the liner side, the share prices of Zim (NYSE: ZIM) and Maersk (Copenhagen: MAERSKB) are down 27% and 23% year to date, respectively.

Among the listed NOOs, the share price of Danaos (NYSE: DAC) is up 26% year to date, MPC Container Ships (Oslo: MPCC) is up 24%, Euroseas (NASDAQ: ESEA) 17% and Global Ship Lease (NYSE: GSL) 13%.