Container index spike reflects GRIs
The Shanghai Container Freight Index (SCFI) spiked upward on Friday, Nov. 1, reflecting general rate increases being implemented by many carriers.
Reported weekly, the index jumped 27 percent. The index is a weighted average of spot freight rates for exported cargo from Shanghai along 15 routes around the world.
An industry note from Jefferies said it was the sixth time in the past two years that "container spot rates moved vertically."
"These vertical movements in spot rates look like bubbles, in our view, as the proper up cycle is usually a more gradual upward slope that is constantly tested and confirmed," the company said. "None of the five previous rallies sustained for more than 3 months, and we may not see an exception this time. Despite the persistent over-capacity issue, container shipping continues to see the largest inflow of newbuilding orders compared to the other shipping segments."
The note from equity analysts Johnson Leung and Benjamin Wang said, "High exit barriers deter any natural correction of the container shipping market. There has not been any meaningful bankruptcy in container shipping despite the industry suffering losses in four out of the past five years." They estimate 2013 will also be a losing year for the industry.
The report suggests that "next year could pan out similar to this year, where we may see huge freight rates volatility on the container liners’ periodic collective strength, but the average freight rates may not be profitable for the industry."
Jefferies showed that there were significant differences in the movement of container freight prices on various routes, with the rate for the Shanghai-North Europe route jumping 112 percent on Friday, but the rate from Shanghai to the U.S. West Coast dropping about one half of one percent. Another index published by the Shanghai exchange, the China Containerized Freight Index (CCFI), moved upward less than four percent. The CCFI tends to be far less volatile than the SCFI, because it measures contract as well as spot rates and traffic from ports throughout.
Despite poor results and low rates, the firm said, "Investment continues to pour in despite the consensus view of over capacity." There has been 1.6 million TEU of capacity placed on order this year, equal to about 9 percent of the world's containership fleet's current capacity. "Comparatively, dry bulk and tanker segments’ new building orders are respectively about 6 percent and 3 percent, relative to their operating capacity," the company noted.
Jefferies pointed out that container shipping is "going through an asset upgrade cycle" because "newer and larger container ships have demonstrated substantial savings that are critical for the liners’ financial performance." The firm compares it to the switch from single-hull to double-hull tankers four years ago.
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