Over the last few weeks, we’ve been keeping a close eye on the precipitous decline in container freight rates in both the spot and contract market.
Some analysts have posited that the current rate behavior, particularly in the eastbound transpacific trade, is indicative of a continued imbalance of supply and demand, while others have argued that it’s simply a matter of typical seasonal ebbs and flows in demand.
The truth of the matter, however, is that both these arguments are actually accurate descriptions of the current state of the market.
Rates are following what could be described as the normal seasonal pattern seen since the Great Recession, but this begs the question: what does “normal” even mean anymore?
To put it another way, the container shipping market is behaving normally compared with the last few years, but the last few years have been plagued by overcapacity, so "normal" isn't necessarily a good thing when it comes to rates. And if rates are following the same pattern as in years past, those supply and demand fundamentals may not have changed as much as some seem to think.
Lars Jensen, CEO and partner at maritime industry analyst SeaIntelligence Consulting, wrote in a recent blog post that the focus of recent news headlines on the erosion of container spot rates over the past two months has created some misguided pessimism about the state of the market as a whole.
“Analysis in this week's SeaIntel Sunday Spotlight shows that the development over the past four weeks is fully in line with normal seasonality following Chinese New Year and cannot presently be interpreted as a sign of renewed fundamental market weakness,” said Jensen. “For Asia-Europe, the rate decline matches perfectly the seasonality of the past 8 years. For Transpacific eastbound, the reality is that the seasonal downturn has been getting steadily worse over the last 8 years, and the developments we are seeing here in 2018 is fully in line with the 8-year trend.”
On it’s face, his analysis is completely true and accurate. Rates have for the last several years followed a seasonal pattern in which they rise in the lead up to the Chinese New Year holiday and then slip as demand wanes into the typically less voluminous spring and summer shipping seasons.
But with all due respect to Jensen, who is something of a legend in the industry when it comes to prognosticating, this view ignores the simple truth that during the last eight years, the market has been fundamentally weak due to an excess of capacity.
His analysis came around the same time as one from rate benchmarking and intelligence platform Xeneta in which CEO Patrik Berglund argued that the current drop off pricing in the transpacific trade could be indicative of persistent overcapacity in the market.
“As we approach the end of Q1 2018, rates so far tell a very similar story the pattern witnessed in 2017,” wrote Berglund. “While historical rate developments are not necessarily reflective of how they may develop in the future, they remain indicative of a market which remains oversupplied.
“Of course, carriers have the power to change market fundamentals via service withdrawals, but the discipline required for this to be sustained in the long run seems lacking,” he added. “Therefore it’s not unreasonable to assume future GRIs on the trade, will on average, be quickly followed by rate discounting.”
Looking at the market from that perspective, one sees that these arguments are not mutually exclusive, but rather two sides of the same coin.
To be clear, weak fundamentals cannot be blamed for seasonal demand swings, but it would be a mistake to assume that rates are following a similar pattern to the past several year due to some seismic shift in those same fundamentals.
Jensen himself goes on to argue that the present behavior of container freight rates cannot rightly called “unusual” in a seasonal and historical context, so it follows logically that as in recent years, carriers may be unable to implement significant rate increases due to persistent overcapacity.
And one thing all three of us can agree on is, as Jensen put it, that “Of course, this does not tell us where the rates will go from here.”