China Containerized Freight Index Plunges to Multi-Year Low, Shanghai-EU Rates Totally Collapse, US Rates Morose

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If trade is a reflection of global demand, and if shipping rates are a reflection of the supply of ships by carriers and the demand for those ships by exporters to meet that global demand for goods – well then, we’ve got a situation on our hands.

Two weeks ago, when I wrote about the Shanghai Containerized Freight Index (SCFI), the index had fallen so far so fast that it seemed to be a statistical fluke, something that would instantly bounce back. The SCFI tracks the spot rates from Shanghai to various destinations around the world. At the time, the SCFI component for Northern Europe had plunged 14% from the prior week to $399 per twenty-foot container equivalent unit (TEU), down 67% from a year ago. An all-time low.

There was a lot of handwringing because, even with the lower bunker fuel costs, the break-even rates for these routes were $800 per TEU, according to a report by Drewry Maritime Research. Over twice the spot shipping rates!

The question was how much lower could rates drop?

A lot lower. Over the two weeks since, the SCFI for Northern Europe plunged another 14% to $343, setting a new all-time low. A terrific 68% collapse from the same week a year ago. Something big is going on in the China-Europe trade.

Carriers have tried to impose hefty rate increases, with UASC pushing for an increase of $1,300 per TEU, and a gaggle of others going for an increase of $1,000 per TEU, according to the Journal of Commerce. None of them were able to make them stick.

The swooning rates came as bunker fuel costs have been rising off their January lows. Higher input costs are hitting container carriers just as revenues are collapsing. A toxic mix.

Now the hope is that planned rate increases for June are going to stick….

On some other routes, carriers have succeed in raising rates, and so not all routes from China suffered the same relentlessly brutal fate. Rates ticked up recently to the Mediterranean, South America, and the US West Coast.

But that doesn’t say much. On the routes from Shanghai to the US West Coast, carriers tried to impose rate increases effective April 1. But after rising by nearly $300 to $1,932 per forty-foot container equivalent unit (FEU) in the first week, the spot rate plunged to $1,623 in the second week, and to $1,596 in the third week. In the week just ended, the index jumped to $1,783. It’s still down 8% from early April, and about back where it was a year ago.

Rates lost ground on other routes, such as to Australia/New Zealand and the US East Coast (those rates had been inflated by the labor dispute at West Coast ports that had caused shippers to bypass them). And so the composite SCFI for all routes rose to 761, from 702 which had been the lowest level in years! The index is down 34% from a year ago and far below the multi-year range between 900 and 1,200.

The much broader China Containerized Freight Index (CCFI), which is sponsored by the Chinese Ministry of Communications, paints a similar picture.

While the SCFI tracks spot rates from Shanghai to global markets and can be very volatile, the CCFI tracks spot and contractual rates for all Chinese container ports, is much less jumpy, doesn’t react as quickly to changes in spot rates, and is “more comprehensive and macroeconomic,” as the Shanghai Shipping Exchange, which operates it, explains. It’s considered “the second world freight index” after the Baltic Dry Index.

And it has skidded 16% since mid-February to a multi-year low of 899. This is what the 2-month plunge looks like:

China-Containerized-Freight-Index-2015-05-01

Another index, the Worldwide Container Index for routes from Asia to the Americas and Europe, which Drewry cites, has plummeted 41% since January to below $1,300 per FEU (ugly chart). Clearly, something is going on in the east-west container business – and beyond – to create this sort of gloom.

On top of the list of reasons is weak demand for imports in Europe, particularly the Eurozone, whose currency has been purposefully massacred by the ECB to achieve just that sort of effect: reducing imports and goosing exports as part of the currency war. Imports measured in euros may actually rise, since the same imports are now more expensive. But the number of containers would drop, since the same amount of euros now buys a lot less in China, whose currency is pegged to the dollar.

In the US, there has been a monstrous buildup of business inventories. Inventories tie up cash. Eventually businesses try to bring them back in line by cutting orders. And that comes on top of a really crummy first quarter.

On the Chinese side, the impact has already shown up, however foggy the figures may be. China’s “official” manufacturing PMI, which was released on Friday, came in at 50.1, barely in expansion mode, and the worst reading for an April since 2005. But it captures the state-owned giants that are less engaged in manufacturing for exports.

The HSBC manufacturing PMI, released today, fell to 48.9 in April, solidly in contraction mode, the worst level since April last year. The new-orders sub-index, which points at what the near future might look like, dropped to 48.7. The March PMI had also been in contraction mode. It’s the HSBC PMI that captures the private-sector companies that are heavily export-oriented. These companies are struggling with very lackluster global demand for their products.

In terms of shipping, on the supply side, carriers have been adding new and ever larger ships, now that money is nearly free. Decision makers had been bamboozled into thinking that QE and interest rate repression would stimulate actual demand! And they’d expanded their fleets to meet this illusory demand.

Cheaply borrowed money gets plowed into creating overcapacity: Investors desperately chase yield, and companies become over-optimistic believers in the fallacy that central-bank asset-price inflation can create actual demand for everyday goods needed or wanted by real people. This happened in the global resource sector, in the US oil-and-gas sector, in the global shipping business…. These are among the places where money now goes to die.

There are other places where money goes to die as investors who’d bought into the hype get crushed. Read…  Stocks in This Totally Hyped Sector Are Crashing

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  17 comments for “China Containerized Freight Index Plunges to Multi-Year Low, Shanghai-EU Rates Totally Collapse, US Rates Morose

  1. Vespa P200E
    May 4, 2015 at 7:58 pm

    Uh Oh – SCFI got “shanghaied”? Is this one of those #s that cannot be made by comrades in ShangHai? If communist comrade controlled CCFI paints similar picture then on boy this may be worsre… Or it it like what appears to be worthless Baltic Dry Index?

  2. Mike R.
    May 4, 2015 at 8:21 pm

    China economy crashing. Developed economies that supply China (e.g., Germany, US, Australia) are being hit hard.

    Too much of everything. Demand dropping.

    Depression coming.

    • CrazyCooter
      May 5, 2015 at 9:29 am

      I would argue the depression has been here a while (in the US anyway). It is being hidden by many and various means, but it is there. Unfortunately, I think the official storyline is going to be “recession” again soon, on the back of the hidden depression.

      This is not going to be pretty …

      Regards,

      Cooter

  3. michael
    May 4, 2015 at 8:37 pm

    Perhaps this is just poetic justice. I can see the layoffs coming in oakland. Congrats on your strike.

    • Mick
      May 4, 2015 at 9:50 pm

      Unbelievable to see people striking in times like these. These people have absolutely no clue what’s going on in the world. Kinda like some people I know, or know of. The dominoes are starting to fall up here in Canada, people are losing their jobs, despite a housing bubble and all time high stock market.

      It’s a complete shock to them, like waking from a dream. For a few weeks they have yet to understand just how hard it will be to replace their job. they get on the positive mental attitude bus, which goes to nowhere.
      Then they just drop out of the loop. It’s happening more and more since oil crashed.

      • night-train
        May 5, 2015 at 4:14 am

        It is easy to delude oneself when the consequences of a fail are so dire. We deny reality because to accept it is to accept that we have a lot less control over our lives than we like to admit. And of course, this time may be different.

  4. Mick
    May 4, 2015 at 9:43 pm

    The QE “experiment” is complete. We now know exactly what happens when you flood the world with worthless paper; you get asset bubbles, which then causes producers to go hog wild increasing production.
    Or, if the asset is cash itself, lenders go hog wild investing in whatever moves and looks like it might give a return. And then you see deflation due to overcapacity and diminishing demand.
    The final result is of course a crash, as usual.

    • CrazyCooter
      May 5, 2015 at 9:32 am

      “There is no proverb counselling that ‘wise men not invest in over-capacity’. Perhaps there should be” – Hugh Hendry

      Regards,

      Cooter

  5. Mr. Reality
    May 4, 2015 at 11:07 pm

    Just wait till the hot money flows out of China dry up. The world is ill prepared for that train wreck and there is nobody left to bail out the western world. Feels like 2007 all over again.

    Mr. R.

    • VegasBob
      May 5, 2015 at 12:54 am

      My guess is the next crash will be worse than 2008-2009…

      • CrazyCooter
        May 5, 2015 at 9:34 am

        I think the salient point is “who is big enough to back stop the system now”.

        This can has been kicked vastly longer than I ever thought possible. Maybe it goes for another lap around the track … or maybe a cashless society is the backstop with negative interest rates and all that. Who knows!

        Regards,

        Cooter

  6. a Texas libertarian
    May 5, 2015 at 10:05 am

    As interest rates have steadily fallen since the 1980’s, due to the concerted efforts of the Fed and Congress to prop up the stock market, so too has the personal savings rate. The less we save the more likely we are to get loaded up in debt, especially in an environment of price inflation, where we are desperate to maintain our standard of living while our real income falls. I think this is exactly what has happened all over the world, except that now, governments are trying to keep the charade going by expanding their own (hence our children’s) balance sheets to ludicrous levels. This balance sheet expansion is resulting in a vast redistribution of resources and wealth, in turn causing ever growing social unrest.

    The end of central banking is coming in the next 10 or 20 years and it won’t be pretty. Perhaps they can maintain control through this next imminent crash, but at some point the game will be up.

    • Justin
      May 5, 2015 at 1:13 pm

      Damn, every one on this site has very poignant points. I love it not only for the content, but also its readers. Keep up the good work Wolf and Co.

      Respectfully,

      Justin

      • a Texas libertarian
        May 5, 2015 at 2:23 pm

        Thanks for the compliment and I agree the readers are very well informed on here, and I’ve learned a lot from them as well as from Wolf.

        Central banking is an issue I’m passionate about, because I believe it is so fundamentally wrong and stupid on such an unimaginably colossal scale. It is also the keystone keeping the whole government financial ponzi scheme from collapsing into a smoldering heap of failed economic and political ideologies, all of which are only slightly less fundamentally wrong and stupid.

        Actually, calling government finance a ponzi scheme is a huge mischaracterization; at least ponzi schemes are voluntary.

    • Maria Fields
      May 5, 2015 at 7:56 pm

      Maybe the end of Central Banking will be BEAUTIFUL!
      Life under central banking is miserable. Maybe this whole system will just sputter and blow out.

      • a Texas libertarian
        May 6, 2015 at 1:02 am

        It will be beautiful, but in the same way that it is beautiful when a cancer patient goes into remission after many rounds of chemotherapy.

  7. Julian the Apostate
    May 5, 2015 at 7:17 pm

    A hearty huzzah, huzzah to Justin. Hail fellow well met. Vespa that shanghaied comment really made me laugh right here in the Steak’n’Shake. I haven’t laughed so hard since reading ‘The Innocents Abroad’.
    The Load God moves freight in mysterious ways, his warehouses to fill. In the freight pantheon he is akin to Loki and loves to play tricks on us. And boy is He pissed. So the next time you’re in a truck stop go back to the Load God’s shrine and light a candle. It won’t help, but it’s good form.
    Excelsior! JULIAN

Comments are closed.