Global container shipping rates are high, but unsustainable, says Fitch Ratings

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Global container shipping companies’ performance will be strong in 2021 after a profitable 2020, Fitch Ratings says. Spot freight rates will remain high in the short term, which will flow through to contracted rates for 2021.

However, Fitch said, it considers the current rates unsustainable in the medium term, as the sector is susceptible to rate volatility and risks of weak economic recovery and trade protectionism, requiring constant prudent capacity management.

A combination of rebounding demand for goods in 2H20, supply chain disruptions – such as container box shortages and port congestion – and more strategic capacity management drove container freight rates up, especially on the routes from China to Europe and the US. Shipping one 40-foot container from China to Europe or the US West Coast now costs over USD8,000 and USD4,000, respectively, from well below USD2,000 a year ago, according to Freightos Baltic Index.

Trade volume recovery was fuelled by a change in consumer spending habits during the pandemic – ordering more manufactured goods while saving by spending less on services, such as leisure and restaurants. It was further supported by inventory re-stocking by businesses that faced acute supply chain disruptions and increased demand for personal protective equipment.

Total volumes shipped from Asia to North America exceeded 2019 levels by over 7% in 2020, according to Container Trade Statistics. A decline in volumes on the Asia-Europe route by about 5% in 2020 indicates a growth potential in 2021 as demand recovers, Fitch said in a report.

Container box shortages and port congestions due to pandemic-related operational disruptions have extended container ships’ turnaround times, further increasing freight rates. A usually quiet period during the Chinese New Year could have eased some congestion, but demand remained strong as China maintained its production levels. The ongoing virus outbreaks in many regions and mobility restrictions are likely to keep freight rates abnormally high in the short term.

These higher-than-usual spot rates will translate into higher contract freight rates in the ongoing spring contracting season. However, we view rate volatility as an inherent sector risk and we expect rates to reduce once supply disruptions related to the pandemic are addressed.

More mature capacity management helped avoid oversupply during the pandemic. After more than a decade of overcapacity pressures, the industry has gone through a radical consolidation through M&As and alliances. Shipping alliances enabled strategic capacity reduction when demand declined at the start of the pandemic and efficiently reactivated fleets when trading rebounded in 2H20.

The three biggest alliances serve around 85% of the US-China routes, compared to about 60% seven years ago, and almost all east Asia-Europe lanes. The container orderbook, as a percentage of existing fleet, is now at its lowest level of below 10% – it was 57% in 2007, it said.

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