By Peter G. Hall, Vice-President and Chief Economist, EDC
Seaborne movements of goods are a great bellwether of global trade. In the pre-crisis period, freight rates spiked on two separate occasions, exposing the pressures that growth in world trade were putting on existing shipping capacity. Crisis saw those rates plunge in 2009, only to revive as public stimulus pumped up the economy. That didn’t last long, and sluggish growth, together with delivery of a deluge of new ships, saw rates plunge. At long last, they are rising again. Time to celebrate?
Some think so. Recently, container shipping giant Maersk declared that the global trade cycle had bottomed out, predicting an upsurge of trade growth in 2014. Its prediction carries a lot of weight – the company single-handedly carries 15 per cent of all seaborne containers. It is backing up its prediction by taking delivery of the first of ten triple-E container ships, the largest container vessels yet, with a capacity of 18,000 twenty-foot-equivalent units (TEUs). Do other data agree with this assessment?
The Harpex index tracks container freight rates across a broad class of container ships. It shows that prices have improved significantly since the start of the year. However, late-2012 rates were down significantly from 2010 and 2011 average rates, and recent growth has only recovered a fraction of the loss. Moreover, growth has been spurred solely by higher rates for smaller-capacity vessels. Rates for ships carrying 4,000-plus TEU are actually falling. Interpretation of the diverging movements is difficult, though, as the super-sized ships are a recent phenomenon. For the moment, the positive movement in prices is encouraging.
Chinese freight rates are not as encouraging. Depressed throughout 2011, rates surged in early 2012, only to tumble through mid-2013. Rates then staged a mini-climb, but not enough to suggest a new up-trend. The Shanghai sub-index follows the same pattern, although the recent monthly trend is decidedly lower. Not all Chinese shipping is showing the same trend, though. Bulk freight rates are up sharply since mid-year to the highest levels since early 2012. The index for coal shipments alone is up over 50 per cent since July, a hint that upstream production is improving. Is China alone?
In short, no. In recent weeks, the Baltic Dry Index is surging, currently more than double its mid-summer level. The current reading is now level with late-2011 rates, and the current trajectory is saying something about bulk freight movements globally. The trend is all classes of vessel, from Handysize to Capesize. Although recent movement is the best news in a long while for the industry, it still leaves freight rates well below normal, and a fraction of the late-cycle heights.
The industry may have to be satisfied with lower overall rates, while grateful for recent growth. Tight shipping constraints at the peak of the last cycle led to a torrent of new orders, which are now being delivered. These orders were predicated on a continuation of rapid trade growth not only between emerging markets and their wealthy developed-market customers, but also in the ultra-rapid pace of growth among emerging markets – more commonly called South-South trade. While these trends are expected to resume, excess shipping capacity is expected to be the norm for a number of years to come, moderating the predictive power of shipping activity.
The bottom line? The global shipping industry provides a great illustration of the excesses of the last global growth cycle. Current shipbuilding suggests that the industry will likely face surplus capacity – and by extension, weak prices – for a number of years to come. What’s bad for the industry could be good for trade flows, though, as there will be plenty of capacity to absorb the coming trade cycle. We can only hope that this time around, global port capacity will keep pace.
This commentary is reprinted with permission from EDC. It is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness.