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Declining freight rates threaten the charter market

Container freight and charter markets are often seen as two sides of the same coin.

But, in recent months, they have been trending in opposite directions: charter markets have been rallying, while the freight price to move shipping containers has been trending downwards.

That is raising concerns in a market where tonnage providers are optimistic of a sustained recovery.

The plight of the freight market is exemplified by the ongoing drop to their lowest levels since August 2016.

Contrast that with the charter market, particularly for larger vessels, where rates for 8,500-teu ships are hitting $21,000 per day.

Strong trade growth has played a key role in this recovery, where vessel demand rose by 5.4% in 2017 and further expansion of 5% is expected in 2018, according to a quarterly report by Maritime Strategies International (MSI).

But the disconnect between charter and freight markets is threatening ships of 7,000 teu to 9,000 teu.

MSI argues that the sustained upwards trajectory for earnings of these “classic” post-panamax class of vessels increasingly requires an “everything-goes-right” scenario rather than a “base case”.

Looking at the charter market in isolation gives the impression that earnings are sustainable.

“Availability here is extremely tight, with the market for vessels over 5,000 teu close to sold out, and this high level of employment for chartered tonnage has of course pushed up earnings,” MSI said.

But it notes that the freight markets are not quite so rosy and that most liner companies struggled to make money towards the end of last year, with the position of those on the Asia-Europe trade particularly perilous.

One of the key drivers behind the pickup in demand for “classic” post-panamax tonnage has been very strong import growth into Latin America and the trade into the Middle East and Indian subcontinent, the analyst says.

This has driven upsizing and widened the potential pool of charterers for these vessels. That includes the likes of Shipping Corp of India, Simatech and Deutsche-Afrika Linien. Each currently has an 8,500-teu ship on charter, although MSI says they fall outside the group of liner companies traditionally regarded as potential end-users of these vessels.

“This increasing exposure to non-mainlane trades is undoubtedly healthy for the segment but should not be overstated,” MSI said. “Over half of the capacity in the 7,600-teu to 9,000-teu class remains deployed on the mainlane trades, with the transpacific accounting for the lion’s share.”

Heavy cascading

MSI reckons that the frontloaded delivery schedule of newbuildings implies that the transpacific trade will be hit by heavy cascading from the Asia-Europe routes over the coming three months. If trade growth disappoints, then it is likely that lines will look to redeliver chartered tonnage, MSI says.

“We believe that the market’s room for manoeuvre is far more limited than we would have hoped,” MSI said. “Underlying supply/demand balances are not as tight as they appear, and the hefty delivery schedule for this year means a shortfall in demand would see charter rates driven down aggressively.”

The near term may see the charter market supported by service reshuffling, coupled with the start-up of the Ocean Network Express, which may see additional vessel requirements.

But unless trade growth on North-South and Middle East/Indian subcontinent trades continues to run at close to 10%, then May to June may see a weakening in earnings for larger vessels, MSI adds.

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