Commodities 2021: Persistently tight containers market expected into 2021 as contract talks evolve

New Delhi — The existing challenges in the container market are likely to persist into the first quarter of the next year as firm demand meets supply constraints and logistical bottlenecks, market sources said.

"All shipping liners have verified that demand is ramping up and is unlikely to slow down before Chinese New Year," said Peter Sundara, Vice President Global Freight Management, Global Ocean Product, LF Logistics.

This is likely to result in elevated prices for the period.

"Right now we see the carriers in such a dominating position, you know it's a seller's market. I think they're going to raise rates across the board to just about every trade where they can. When they can," said Stephanie K. Loomis, Vice President FCL Product, US and Canada, Vanguard Logistics Services.

However, downside risks to the demand situation exist.

Although massive economic stimulus in the US has pushed up e-commerce and transpacific volumes, demand may start waning in the absence of more economic stimulus from the country, Peter Sand, Chief Shipping Analyst at BIMCO, said.

Container prices in Asia rose to record levels this year as export demand remained firm amid the pandemic related disruptions.

"In the beginning of the year, for a cargo from Shanghai into Sydney, the rate was only $650 or even closer to $700 for a forty-footer, now the rate for Shanghai into Sydney is at least $5,100 for a 40 ft container. And that is also the rate for Shanghai into US East Coast, New York," according to Sundara.

On Dec. 11, Platts Container Rate 5 -- North Asia to East Coast North America -- was at $4,800/forty-foot equivalent unit as compared to $3,250/FEU in July.

Port congestion in Asia

Container availability in Asia has failed to pick up over the last few months due to a striking imbalance in incoming and outgoing vessels.

With major shipping liners halting their operations in China during the first two months of the year, the equipment shortage and operational challenges are only going to get worse.

Shipping liners including German-based Hapag-Lloyd, Singapore-based Ocean Network Express and Hong-Kong-listed Orient Overseas Container Line have suspended accepting shipments to ports in South China and Fujian on account of coastal feeder services halting operations up to the Chinese New Year.

"We have told the customers to look into using 20 ft GPs (general purpose) and also non-operating reefer and also 45-footer GPs as substitutes. But the issue is once you do these kind of accommodations, then these containers also get depleted, so now we have shortage of non-operating reefer in the market, and also 45-footers," Sundara said.

Even though carriers are trying to lease more containers, the leasing market is also out of stock now, the manufacturing factories in China are also stocked up in terms of demand and can't churn out new built vessels quick enough, according to Sundara.

Governments step in

Earlier this year, the Chinese government summoned container carriers to discuss measures to curb the price hike on China-US routes. According to media reports, the government even advised the carriers against general rate increases (GRIs) and blank sailings.

Later, the US Federal Maritime Commission also launched an inquiry into the fluctuations in container markets along with the carriers' policies and practices with regard to detention and demurrage, container return and container availability.

More recently, the Indian government rolled out a draft Merchant Shipping Bill 2020 with a provision to put a cap on freight rates, stating: "No service provider or agent shall levy any freight charges other than the all-inclusive freight specified."

However, carriers have continued to introduce GRIs and price surcharges.

In the past few months, there has been a flurry of peak season surcharges, congestion surcharges, equipment imbalance surcharges, and many more, sources said.

Even though carriers are wary of increasing the rates beyond a certain level due to pressure from government authorities, they are coming up with innovative surcharges in the form of additional surcharges, Sundara said.

Spotlight on service commitments

While shippers in Asia may want to wait for prices to cool off before going into a long-term contract, carriers would expect to capitalize on the peaking spot rates.

"The shippers may consider holding back on long-term deals until the Chinese New Year. You aren't going to see long-term contract rates going up to the sky-high level like the spot market but one thing is certain that it will go up substantially, I think that is almost a given," Lars Jensen, CEO of SeaIntelligence Consulting, said.

The shippers won't mind paying $100 more per twenty-foot equivalent unit if it gives them a greater access to capacity and a guarantee on the price, Andy Lane, Director, CTI consultancy said.

However, even a high paying contract may not provide a guaranteed space.

When negotiations happen in 2021, the focus will remain on service commitments rather than prices, according to Loomis.

The customers who hold long-term contracts with shippers may be subjected to GRIs and Peak Season Surcharges but those who have a better contract and manage to avoid the additional surcharges, may find their bookings rolled over to make room for lucrative spot deals.

"It finally boils down to your relationship with the carrier and to which degree you can make the carriers honor their contracts," according to Jensen.

Trading relationships are also expected to gain importance as carriers are most likely to honor their contracts with shippers which also honored their contracts in the situations where the spot market is lower than the contracted rate, according to sources. The shippers who honor that higher contracted rate are those ones which find it easier to get their cargo on board now.