Liner shipping companies are responsible for operating the world's 5,087-strong containership fleet. They own 52% of the capacity and charter in the rest from independent owners. In principle they then turn a profit on this by transporting containers around the world for cargo shippers.

Up And Down
Recent experience suggests that this can be a difficult business. Freight rates have become very volatile, creating unpredictable earnings. The graph shows a monthly weighted average index of spot freight rates on the peak legs of the two largest mainlane trades, the Far East-Europe and the Transpacific. Long-term historical data is hard to come by but it is possible to estimate an index based on the data available at the time, including CCFI and SCFI indices.

Last year the two trades accounted for 28m TEU of cargo, 17% of global box trade and a large slice of income for many major liner companies, for whom volumes carried on both a contract and spot basis are impacted by the rate environment in general.

Shipping in general is a cyclical business, but what is striking is the change in spot rate volatility pre and post credit crunch. The period between 1995 and 2007 saw two big dips and two clear peaks.

In the much shorter period since the crash there has been huge volatility and already two clear peaks and three market troughs. That’s more cycles in the last six years than in the previous twelve, not to mention the fact that the monthly index has moved within a band of $1,148 compared to $593 before 2008.


It Went Crunch
Pre-downturn freight seemed to follow longer cycles. Running capacity was linked to the size of the fleet and when demand was healthy (e.g. when Chinese exports boomed) liners benefitted and when it was weaker (e.g. the end of the dotcom bubble) or they had delivered too much capacity, then lower rates ensued.

Getting Very Bumpy
But in 2009 box trade declined by 9% whilst boxship fleet capacity grew by 6%, creating an almighty surplus and an imperative for lines to manage capacity to support rates, with sitting things through no longer an option.

Initially idling slow steaming and redeployment of surplus capacity pushed rates back up, but by 2011 reactivated capacity pushed rates way back down again. Since then volatility has reigned supreme and attempts to rein in capacity have been fighting a tide of supply pushing rates down, all the time with fuel costs at elevated levels. In 2012-13 the index peaked at $1,576, $1,341 and $1,257 before trending back down each time.

So container freight has become spiky, and liner companies could do without the volatility. Whilst overcapacity remains (4% of the boxship fleet is still idle), maybe the message is to ignore the ups and downs and get on with business. Those who have focused on operating vessels efficiently and cutting costs look to be doing the best. If you’re stuck on the rollercoaster, hold on tight and keep your eyes open.

(Source: Clarksons)