Market Watch

The composite Shanghai Containerised Freight Index (which gives a representative overview of spot box-rates on exports from Shanghai across 15 major routes) fell each week in August. September’s first publication brings the losing streak to its ninth consecutive falling week. 

Despite what is traditionally the peak season with plenty of upside, the index now lies at 1450.22 points, down 8% from its 1583.18 point high in early July. 

Spot rates on Shanghai to Europe and the US west coast have fallen by 6% and 7% respectively from their late July peaks, and these falls are increasing in size week on week, suggesting a quickening pace for reductions as we move through Q4 into 2011. 

A snapshot of the box-rate forward curve (Figure 1 – derived from the current bids and offers placed by market participants on container swap contracts for the coming months, quarters and calendar year) shows a strong market consensus for the continuation of this negative trend. 

A snapshot of the container swaps forward curve at 4pm on Friday 3 September. Click on image to enlarge

So why are box rates falling? Aren’t we in a peak season? 

Not only are box rates falling naturally, as a result of weakening supply-demand fundamentals (backdated tonnage delivery, stagnant economic growth and ever increasing mountain of insurmountable sovereign debt), but also thanks to a series of coincidental pressures during Q2 (unprecedented restocking, “box shortages”, seasonal optimism and time-limited, post-recession stimulus packages), box-rates entered Q3 (and now Q4) at an overpriced level. 

The problem is that the temporary factors that led to Q2 overpricing are no longer evident. Box-rates are, thus, falling not only to correct this premium, but also to catch up with a fair and intrinsic box-rate that is falling with every surge of new tonnage delivered and every unit of mounting sovereign debt that faces developed, consumer economies. 

What next? 

Despite long-term, negative fundamentals that are unlikely to reverse for many, many years, there are a number of short-term scenarios that might introduce some significant volatility in box-rate pricing over the coming months and years similar to that seen in Q2. 

The nature, timing and scale of these events are difficult to predict and often only become evident with hindsight. One obvious example will be the way in which lines act to handle the entry of excessive capacity in the coming months. Will they lay-up again or super-slow-steam to manage capacity? 

The outcome will prove significant in dictating the extent or moderation of damage caused by the acceleration of falling box rates. 

In trade terms, the promised devaluation of the Chinese renminbi would create a burst of strong US dollar spending (with an associated upward pressure on box-rates), but equally could promote a potentially devastating spiral in trade as producers in “low-cost countries”, China included, lose their competitive international edge. 

In conclusion: for the long-term, box rates look set to continue to fall, at least for the next few years. 

Unlike short-term effects, the general underlying economic trend is bearish and, will take many years to slow, turn and eventually reverse. 

In the short-term, box rates will continue to fall rapidly from their recent overpriced highs to more realistic levels that reflect the bearish predictions for the Christmas season. In the mid-term, month-to-month volatility around intrinsic value will fluctuate according to several short-term factors, most of which will be extremely difficult to predict. 

Arthur Worsley is a container swaps broker with Freight Investor Services 

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