Price war, cheap long-term agreement, and delivery of a large number of new ships
Vespucci Maritime CEO Lars Jensen and Xeneta CEO Patrik Berglund discussed some issues about the shipping market in the future at the Freight Waves Global Supply Chain Week online forum.
The Future of the Alliances
Jensen said that the decision to split 2M will spill over to the other two alliances, and operators are thinking about whether it is the right alliance to join or whether it is time to change things. He thinks now it’s time to clean things up. But he argues that the restructuring of the alliance does not guarantee lower freight rates for freight shippers. “I would caution shippers not to use alliance vs. non-alliance as an indicator of how high or low a freight rate is. I don’t see any connection between the two. During Covid-19, the extremely high rates we’ve seen have nothing to do with the alliance or non-alliance rates. ” Jensen said the 2021-2022 boom was a historic deviation that is unlikely to be repeated.
Suspension of flights and price war
In the second quarter of 2020, when the Covid-19 lockdowns in the US and Europe were at their peak, container alliances were very good at canceling sailings, artificially reducing supply to match demand, and limiting the decline in freight rates. Some analysts predicted that carriers could use the same strategy to prevent the sharp drop in freight rates after Covid-19, but they have not done so. “In 2020, I wonder if this is a fear-based move when the Covid-19 hit and we all expected a big drop in consumption,” said chief executive Patrik Berglund, according to the short-term and long-term freight index.
Jensen insists that today’s price war among carriers doesn’t mean they haven’t learned their lessons about capacity management. Before market consolidation, the normal state of affairs most of the time is price wars. After consolidation, there will still be operators who find that market share growth is beneficial to them, and of course, they will pursue this, so integration and capacity management do not mean that there will never be price wars. It just means that the chances of a price war will be lower and likely to be shorter than in the past.
What will happen to the freight rate?
The current price war has caused freight rates to plummet, especially in the trans-Pacific market. Patrik Berglund, CEO of Xeneta, said: “It’s hard to say how far freight rates can fall, at least not yet bottomed out.” According to data, the average spot freight rate between Asia and the West is about 1,300 -$1,400/FEU, “but if you look at the lower end of the market, it’s closer to around $1,000.” Despite the sharp spot rate jump due to continued support from annual contract rates down, the carrier’s fourth-quarter profits were still unusually high. Most long-term agreements in the Asia-Europe region will be re-signed on January 1, and most long-term agreements in the trans-Pacific region will be signed on May 1. The plunge in spot freight rates means that the next round of contract freight rates will be substantially lowered.
Operators should be most worried about how they can boost the short-term market to avoid being forced to take huge losses on long-term contracts. Last year, Given the ongoing supply chain crisis at the time, many shippers had signed contracts on the US line well before May 1. This year, the timing will be different. “It will be a late signing. “Jensen said, “In the case of an extremely weak market, freight rates continue to fall, and there is not much urgency for customers to sign contracts. “
Cyclicality is coming
A key factor influencing the current market sentiment is the upcoming wave of new container ship deliveries. More containership tonnage is currently on order globally than at any point in history. These new ships will be launched in the coming months, with large deliveries continuing in 2024. Before Covid-19, the balance sheets of shipping companies were very fragile, and container lines placed orders to build new ships after years of insufficient orders. The outbreak of Covid-19 has left shipping companies with a lot of money to order new ships that are more fuel-efficient and will be much cheaper to operate. Asked whether operators could use a strategy to avoid excess capacity after all the new ships are delivered, Jensen said: “The reality is, this is a cyclical industry. As usual, when there is a peak at that time, carriers made money and would order more ships, which would take years to deliver, so what we’re seeing now is going to happen anyway, regardless of the Covid-19.” In contrast to most other analysts, Jensen said that the upcoming new building market is more optimistic.
