The recovery of China’s manufacturing base from the Covid-19 lockdown has been outstanding and after a stutter, demand for Chinese goods in Europe has surged, pulling up container freight rates. But is this a one-off or are the freight rates sustainable?
China was at the epicentre of the Covid-19 pandemic and rapidly shutdown the country to contain the disease. This had a dramatic impact on the Chinese economy but China made progress to contain the virus. In April, VesselsValue noted that cargo miles had recovered and started to follow a similar pattern to last year. Demand declined shortly after this however, as throughout May, cargo miles were lower than levels seen at the same time last year. This decline correlated with the increase in Covid-19 cases in the US, as the impacts of the virus were felt later in the West and demand for goods lessened due to lockdowns.
In Europe, countries emerging from lockdown put measures in place to safely receive cargo and ports began to clear. Things took a positive turn at the start of June, and cargo miles began to improve.
Meanwhile, China’s two tenets of the internal growth strategy and building its urban infrastructure have been the driving forces behind its remarkable recovery. The official industrial production growth in China in August 2020 was up 5.6% compared to August 2019. By contrast, US industrial production growth in August 2020 was 7.7% down year-on-year. China’s GDP is now forecast to grow by 1% in 2020, which does not seem all that remarkable until it is compared with global growth, which is forecast to slump by 4.9% in 2020.
Looking ahead, GPD growth in China is forecast at 8.2% next year, versus a global GDP growth forecast of 5.4% in 2021. With regards to global seaborne trade, Clarkson Research Services forecasts this will shrink by 4.4% across 2020, similar to the level seen in 2009 after the global financial crisis.
The recovery in China and then in Europe saw a mini-boom on the Asia-Europe container trade routes in Q2 and Q3 2020. At the end of Q3, the headline rates on Asia-Northern Europe (specifically Shanghai to Antwerp) had increased to US$2,336/FEU according to Alphaliner. This is the highest level for three years.
This recovery in East-West container freight has been overshadowed by the boom in rates taking place in the transpacific trade. According to Alphaliner, earnings on the Asia-Europe trade rose to US$0.19 per nautical mile. This is far below the earnings on the Shanghai-Los Angeles route of US$64 per nautical mile, but the presence of 18,000+ TEU mega ships on the European route brings down the economies of scale. The marginal costs favour the 18,000+ TEU mega ships.
Marginal costs are one of the few elements vessel operators can directly control that influence the bottom line. Fill a larger ship and economies of scale dictate that the marginal costs will be lower. The 18,000+ TEU mega ships have now been trumped on the Asia-Europe trade with the introduction of CMA CGM Jacques Saadé, now the world’s largest liquefied natural gas-powered container ship, which has set a new world record for the number of full containers loaded on a single vessel.
Sailing from Asia-Europe with a verified load of 20,723 full containers on its maiden voyage, CMA CGM Jacques Saadé, is part of a weekly service comprising 13 calls over 84 days. CMA CGM Jacques Saadé has a potential full load capacity of around 24,000 TEU.
“To carry so many containers, we have to be able to stack them 10 or 11 high on the deck, giving rise to strict constraints linked to the vessel’s structure and, crucially, how containers are stowed,” explains E&W Lines operations manager Marc Olazabal, who directs the Group’s operations, including on the FAL 1 line.
“The vessel is so well designed that we were able to pile containers of over 10 tonnes in a 10-high stack, which is outstanding. During the call in Singapore, the nine cranes in position completed around 4,000 loading and unloading movements. All the cranes had to have the same number of movements for the operation to be completed at the same time, and to avoid any reduction in our productivity,” he says.
The increase in freight rates on the Asia-Europe route seems sustainable – at the moment. October 2020 was a better month than expected. This was the first month since the outbreak of Covid-19 to host a holiday in China since the shutdown of the Chinese New Year. The Chinese Holiday – Golden Week (1-7 October) – had led to liner companies warning shippers there may blank sailings to cope with the fall in demand, but the need to reduce capacity was less than expected.
The lack of freight rate slippage over Golden Week is more evidence that freight levels are sustainable, but the big question is the stock build up to Christmas. It is now apparent that the European second wave of the Covid-19 coronavirus pandemic is likely to extend into the Christmas holiday season. France has announced another national lockdown until 1 December 2020 and Spain and Germany are expected to follow with their own national lockdowns.
Covid-19 has already forced even the most hesitant of online shoppers to embrace the new technology and it is widely expected that Christmas 2020 will see the highest level of click-to-buy purchases ever. This will place extra stress on the distribution hubs and shippers are gearing up by placing orders with manufacturers in China. A tsunami of manufactured goods is expected from China in Q4 2020. MSI senior analyst Daniel Richards notes in the Horizon Monthly (Containerships) that there is “a sense of urgency on behalf of shippers to receive cargoes and rebuild stocks.”
In this regard, the management of container ship capacity by operators through blank sailings and other delays to delivery is one of the more frustrating aspects of container shipping. Maersk has already announced one blank sailing in November on one of the Asia-Europe routes.
To this end, independent shipping intelligence service Drewry has introduced the Cancelled Sailings Tracker. The new service, which starts for subscribers in October 2020, will provide a snapshot of blank sailings announced by each Alliance versus the number of scheduled sailings.
Drewry notes that port throughput is confounding sceptics on the container trade’s ability to recover from the pandemic. World container port throughput confounded expectations in Q2 2020 (and most probably Q3 2020 too) to register a far smaller decrease than envisaged of around 8% year-on-year (as opposed to the anticipated 16% drop as published in June). As a result, Drewry has upgraded its 2020 annual global forecast to -3.3%, up from -7.3% it predicted in June 2020.