A SURPRISINGLY STRONG TRADE RECOVERY
A surprisingly strong trade recovery has caught manufacturers, shippers, port authorities, intermodal providers (rail and truck companies), liner companies and many others unawares. In recent months, we have seen substantial and unprecedented supply chain disruptions, as there is hardly enough capacity at any level to accommodate booming demand.
In shipping, liner operators quickly ran out of available slot capacity and export-cargo was stranded at major Asian ports and elsewhere. Shippers were willing to pay premium prices to secure shipments of their cargo; liner freight rates skyrocketed to levels never seen before, and so did liner profitability. Supply disruptions contributed to lengthy port delays, thus making vessel shortages even worse.
Liner companies - in dire need of extra tonnage - looked to the charter markets to supplement their operating capacity. Before long, charter markets were sold out as well. At the start of 2021, charter rates soared past 2011-highs and continue gaining momentum today. The same is true for vessel prices.
The question on everyone’s mind is how long the rally will last. The longer the upwards run continues, the more bullish the sentiment, perhaps justifiably so considering that recently signed long-term contracts at premium prices (by liner operators with shippers and by tramp owners with ocean carriers) should pay dividends for a while.
The argument that the global economy remains at pre-pandemic levels and we should thus expect an even stronger trade rebound when the world emerges from the crisis fuels expectations for “super-cycles” and bright market outlooks. However, this is precisely where caution needs to be exercised and judicial planning is needed more than ever.
In recent months we have seen a disconnect between economic growth and global trade. Trade volumes have surged while advanced economies still struggle to recoup 2019 GDP levels. Many rushed to explain this phenomenon by saying that the trade surge was attributed to inventory build-up after the lockdowns in the spring of 2020. But recently published official data prove this argument wrong. US inventory to sales ratios are at multi-year lows. As a matter of fact, manufacturers around the world are struggling to cope with increasing demand at a time when they are short of essential components.
Of course, there are several reasons contributing to the spike in containerized demand, such as a slow rebound in manufacturing in the West which helped boost shipment of products out of China (Chinese manufacturing output recovered much faster than production in the West), and an increase in E-commerce which helped facilitate and boost consumer demand for goods bypassing the middleman. But undoubtedly, the paramount reason for the explosion in containerized trade during the last nine months has to do with the surge in consumer demand for manufactured goods while the world continues to fights the pandemic. In turn, two factors contributed to this surge: first, the shift of consumer spending from services (restaurants, theater, travel, etc.) to spending on electronics, home goods, safety products and durable goods, such as cars, furniture, appliances, etc.; second, the massive fiscal and monetary (low interest rates) stimulus packages spend by governments around the world helped boost global consumer spending.
Adding to these two factors which helped propel consumer demand and containerized trade (shift in consumer demand and stimulus packages) is a third factor which contributed to the shortage of available ship capacity and boosted freight and charter rates. The supply disruptions we referred to above led to significant port delays, immobilizing vessels at ports and adding to vessel supply shortages.
So what happens when the global economy emerges from the pandemic-induced downturn? Will trade growth accelerate as has been the case after past recessions? Or will the three factors described above (shift of consumer spending from services to goods, stimulus packages and port delays) help underpin trade at a dire time gradually unwind to the detriment of trade demand? We think the latter will likely be the case. An uneven recovery around the world is likely to further muddle the picture. Caution at a time of exuberance is likely to benefit the wise.
The Marsoft Containership Quarterly Report Q1 21 has recently been published. For details on this and Marsoft’s view on market trends and our continuing support of a greener industry, contact one of our offices or email@example.com.