At the beginning of the second quarter of 2017, the International Monetary Fund (IMF) raised its outlook for 2017 with a projected rise in economic growth from 3.1% in 2016 to 3.5% in 2017 and 3.6% in 2018. This is an encouraging sign for 2018, as the trade projection is slightly higher than the 3.4% of 2017. What is encouraging for trade will naturally be supporting for shipping and ocean freight prices too.
However, freight rates are reversing after climbing for most of this year, raising questions about the sustainability of the global trade recovery. Decade-old oversupply issues swamped demand for containerised sea trade in the third quarter. Over 90% of trade is routed through ships, making the industry a bellwether for the worldwide economy.
Some pockets around the globe are already witnessing a downward pressure. The global trade order book at around 13.5% of capacity is not high. Given that freight rates are largely determined on the basis of supply-demand balance, they will continue to remain fragile.
The end of 2017, shaping up to present one of the strictest capacity crunches for 2018. The ongoing recovery efforts after this year’s major hurricanes, the upcoming electronic logging devices (ELD) mandate implementation date, and continuing tightening of labour markets, will push the boundaries of shipping capacity.
The International Monetary Fund forecasts growth in world trade volume will slow to 4% in 2018 from a projected 4.2% this year, though that’s still higher than the seven-year-low of 2.4% hit in 2016. Concern about US protectionism and China’s attempts to rebalance its economy away from exports toward domestic consumption pose risks to the revival.
Fitch Ratings expects supply of shipping containers to grow more than 5.5% in 2018, outpacing an over 4.5% expansion in demand. With the increase in mega ships in the main trade lanes of the world, carriers are expected to increasingly look at the port pairs that are most productive and profitable for them and focus their efforts on those trade lanes.
Much of the focus is expected to be on reducing the average price per call per port on the one hand and working on increasing the ocean freight price for those productive ports which offers customers a quicker transit and sustainable service offering. Another means of optimising capacity is reducing it.
Drewry Shipping Consultants expects the container-shipping freight growth rate to drop to less than 10% in 2018 from around 15% in 2017 as a supply glut hits home. CMA CGM, the container shipping major, recently signalled slightly lower rates for 2018 in early negotiations of Asia-Europe contracts.
Given containerised trade growth in the first half was somewhat subdued, it is possible that full-year growth will fall short of double digits. Much will however depend on fourth-quarter growth levels, which so far look positive.
In a report on the impact of rising freight rates on the global grain and oilseed trade, the industry predicts, dry bulk time charter rates are forecast to increase between 10% and 20% year on year in 2018 and 2019 due to lower dry bulk vessel supply growth.
The low freight rate environment in recent years reduced vessel owners’ interest in ordering new vessels. The current order book shows that new building deliveries for 2018 will be down 43% year on year and 28% year on year in 2019.
Dry bulk carriers should have better returns in 2018 and 2019 as average time charter rates are expected to be better than this year’s, thanks to better utilisation levels.
A moderate increase in dry bulk volumes of 2.7% expected in 2018, coupled with low vessel supply growth of 1.2%, should provide support for dry bulk freight rates. The overcapacity in shipping undermines the current rebound in dry bulk and container shipping rates and puts in doubt its longevity. Only prudent capacity management could reverse sector fundamentals, leading to a sustainable recovery in freight rates.
Sea News Feature, December 22