Box shipping demand loss could trump gains from supply chain disruptions
THE container shipping industry convened at the TPM26 conference in California in the beginning of March, in the early days of the war with Iran. The talk at the event focused on service disruptions, while the mood on forward demand was upbeat.
The view at TPM26 was that the Strait of Hormuz closure backs up cargo bound for the Middle East Gulf, gums up Asian transhipment hubs, and pulls equipment and ships out of position.
Regional disruptions from the war ripple across global supply chains, while the return of the Red Sea route — a negative for liner profits — is off the table.
War fallout and continued diversions around the Cape of Good Hope render global boxship supply less efficient than it would have been had the US and Israel not attacked Iran.
Supply inefficiencies vs demand destruction
The containership fleet has become even less efficient in the three eventful weeks since TPM26.
The average price of bunker fuel at the world’s top 20 hubs has more than doubled, according to data from Ship & Bunker.
The average price of high sulfur fuel oil, used by boxships with scrubbers, averaged $916 per tonne at the top 20 hubs on Thursday — the highest ever recorded. The average price of very low sulfur fuel oil, burned by containerships without scrubbers, was $1,049 per tonne, just $14 per tonne shy of the all-time high reached after Russia invaded Ukraine.
The immediate effect of the bunker fuel spike is a slowdown in ship speeds, creating yet more inefficiencies.
It’s not just price: some bunker suppliers could run short of fuel, leading to delays or route diversions. Maersk is so worried about this that it is getting into the business of moving fuel itself, something it has never done before.
There is also concern about the landside portion of containerised transport, particularly in Asia. During Covid, the most severe disruptions were on the landside legs of the supply chain.
“Diesel has emerged as [Asia’s] immediate chokepoint,” wrote JPMorgan global commodities analyst Natasha Kaneva in a research note. “Surging prices are slowing both travel and freight.”
Container lines are passing costs along to shippers in the form of emergency bunker surcharges and, more recently, emergency inland haulage fees.
Supply chain disruptions have been highly positive for container shipping over the past five years: first in the pandemic, then during the Red Sea crisis. But demand was booming in the Covid years, and it continued to grow amid the Red Sea crisis.
Positive views on demand at TPM26 were based on the widely held assumption that the Strait of Hormuz closure would be brief. Three weeks later, there is no such assumption: the base case is for an extended closure. A lengthy closure could lead to a decline in goods demand that overwhelms the rate benefits from supply chain inefficiencies.
“The conflict in the Middle East has created the largest supply disruption in the history of the global oil market,” warned the International Energy Agency on Friday. “Concerns are growing about the impacts of higher prices on households, businesses and the broader economy.”
According to Sea-Intelligence, “The concern related to global container shipping would be more aptly placed on the potential indirect impact [that] an oil price shock can cause to global demand. A sudden economic downturn due to an oil price shock could lead to plummeting container volumes.”
At this month’s Capital Link International Shipping Forum in New York, Ted Young, chief financial officer of Dorian LPG, drew a connection between liquefied petroleum gas shipping and demand for containerised goods.
“Around 40%-45% of LPG that goes to the petrochemical sector goes into the plastics value chain,” said Young.
“If there is demand destruction for propane, yes, you won’t be able to run your steam cracker or your propane dehydrogenation plant. But it won’t really matter, because there really wouldn’t be much demand from the guys who turn the propylene into plastics if there’s a dampening of consumer demand.”
Limited gains for mainline spot rates
The Strait of Hormuz closure has led to a spot rate spike for tankers, liquefied natural gas carriers and, more recently, very large gas carriers. There has yet to be major upside for container shipping, with the exception of trades linked to the conflict region.
The Shanghai Containerised Freight Index for the Shanghai-Middle East route has more than tripled, from $1,960 per feu the week before the war to $6,648 per feu in the week ending Friday.
Another example: trade from Asia to the northwest coast of India.
“Nhava Sheva in India has emerged as one of the most attractive stopovers for frustrated cargoes,” said Xeneta chief analyst Peter Sand. “Shippers would rather have their [Middle East] cargo dwelling in Nhava Sheva than stuck in the port of origin.”
Over the past month, Xeneta’s assessment of the average short-term rate from China to Nhava Sheva has risen 70%, to $2,305 per feu from $1,358 per feu before the war.
Looking at the range of rates paid on the China-Nhava Sheva route, the mid-high (75th percentile) rate has doubled over the same period, rising from $1,482 per feu to $2,936 per feu.
The mainline container trades have seen smaller gains, as well as some mixed signals, including some declines this week.
The SCFI Shanghai-US west coast assessment was $2,054 per feu this week, up 11% from the week of February 27, before the war, but down 9% week on week (w/w).
The SCFI Shanghai-US east coast index came in at $2,922 per feu, up 9% versus February 27 but down 6% w/w.
The SCFI Shanghai-North Europe index was at $3,271 per feu, up 15% versus February 27 but down 1% w/w.
The Asia-Mediterranean trade, which diverts around the Cape of Good Hope, is faring best. The SCFI put Shanghai-Mediterranean spot rates at $5,569 per feu this week, up 21% from pre-war levels and up 4% w/w.
Drewry’s World Container Index showed gains of 10%-19% versus late February for the four main east-west trades. Xeneta’s daily short-term assessments were up 13%-26%.
Wartime gains have not been what carriers had hoped for, said Linerlytica earlier this week.
“Carriers failed to push through their mid-March rate hikes to North Europe. [They] will make another attempt to lift rates on April 1, although sentiment is starting to cool as the expected disruptions from port congestion and equipment shortages have turned out to be less than initially expected.
“Demand for the Med is also starting to ease,” said Linerlytica, adding that “transpacific carriers postponed their March 15 rate hikes due to lacklustre demand and ships still sailing light to both the west coast and east coast.”
Content Original Link:
" target="_blank">
