Shanghai Containerized Freight Index Collapses: China-US Rates Hit Hard, China-Europe Rates Plunge to All-Time Low

First was the Baltic Dry Index, which tracks rates for transporting the major raw materials in bulk by sea. Reflecting the totally battered global commodities market, it crashed to an all-time low in February, though it has since edged up a tiny bit.

Now, containerized shipping rates are taking a majestic drubbing, and those from China to Europe have collapsed to all-time lows.

The Shanghai Containerized Freight Index (SCFI) that tracks shipping rates from Shanghai to Northern European ports plunged 14% from last week to $399 per twenty-foot container equivalent unit (TEU), down a vertigo-inducing 67% from the glory days just a year ago. It was the 11th week in a row of declines, and it set a new all-time low.

The index is now half of the key rate of $800 per TEU that a report by Drewry Maritime Research, released on April 19, considers the break-even rate for these routes even at the currently lower fuel costs. This leaves carriers deeply in the red.

The Asia-Mediterranean routes have experienced a similar collapse in shipping rates. The SCFI for these routes plunged 11% from a week ago to $540 per TEU, down 60% year over year, also setting a new all-time low.

The link between the global economy, external trade, and the shipping industry is clearly felt in the freight market, explained Peter Sand, chief shipping analyst at the Baltic and International Maritime Council (BIMCO), the world’s largest international shipping association.

He blamed an oversupply of ships, including “the continued inflow of new ultra-large container ships on the Far East to Europe trades,” and the deteriorating exports from China so far this year.

So carriers announced big rate increases in this environment effective May 1, with some of them more than doubling the current rates, in an oversupplied market that faces deteriorating exports from China to Europe and other locations.

“The sheer magnitude of the increase is nothing short of ludicrous,” explained Richard Ward, a broker with FIS Container Derivatives, told the Journal of Commerce. Those efforts to raise rates are unlikely to be successful, he said. “Even more telling is that carriers are unable or unwilling to manage supply for long enough duration that would help them to prop up rates for a prolonged period of time.”

Seeing the writing on the wall, several carriers have since withdrawn those announced rate increases.

A similar scenario is playing out on the trans-Pacific routes, from China to the US West Coast. Carriers tried to impose rate increases effective April 1, but they almost immediately fell apart. After rising by $297 to $1,932 per FEU (forty-foot container equivalent unit) in the prior week, the spot rate now dropped by $309 to $1,623 per FEU, and is down 10% year over year.

Drewry figured that shippers were trying to get through this period by cutting costs and improving their network through mega-alliances. They got a helping hand by the drop in the rates of “bunker” (the bottom-of-the-barrel, asphalt-like fuel that large ships use), thanks to the global oil bust. And so Drewry forecasts that with these cost cuts and lower fuel prices, carriers could make “a similar” profit as last year, which had already been anemic, but warned that “this forecast could easily be derailed as freight rates in many Asia export trades are in a tailspin.”

The report calculated that at these rates, 85% of the ships in the trade would be losing money on each voyage, “even if the ships were full (in which case rates would be heading in the opposite direction).”

“These are clearly very difficult times for carriers,” the report said. “While spot rates are probably close to the bottom, they can still fall a little further until the higher-cost carriers are forced to pull capacity.” Alas, pushing through rate increases “in an oversupplied market is a very tough sell.”

Now everyone is hoping – because that’s all they can do – that China’s export orders will miraculously pick up for the coming peak season.

Maritime shipping rates are a gauge of the global economy, though an unreliable one because in addition to being a function of demand triggered by global trade they’re also a function of supply of vessels. But what we now have are declining exports from China because of crummy demand in the rest of the world, particularly in Europe – made worse by an oversupply of ships.

And this overcapacity is where central-bank policies come in. As is obvious after six-and-a-half years, QE and interest rate repression in the major economies have not, and cannot, create demand. But what they do accomplish is offer nearly free money to suppliers, including carriers that can use this money to buy new ships and fund operating losses. And thus easy money creates oversupply, and downward pressures on prices.

To quote Ed Yardeni: “Repeat after me: Easy money is deflationary.”

Easy money not only stimulates supply, but it also “allows ‘zombie’ companies to stay in business” though they lose money, he said, and thus they further boosts supply. Something that central bankers simply “don’t get.” Read…  The “Insanity Trade:” Where Does It Go From Here?

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  6 comments for “Shanghai Containerized Freight Index Collapses: China-US Rates Hit Hard, China-Europe Rates Plunge to All-Time Low

  1. Apr 21, 2015 at 4:26 am

    Speaking of, do you think China’s economic growth could go below the 7% line anytime soon ?

    • juno
      Apr 21, 2015 at 8:56 am

      It probably is below 7% but China will never admit same. The pressure on regional authorities to report stellar growth under pain of death keeps these data buoyant, no matter what demand looks like.

    • Debtserf
      Apr 21, 2015 at 9:36 am

      I thought it already had?

    • MC
      Apr 21, 2015 at 9:43 am

      An analyst for HSBC said China’s economy behaves according to Heisenberg’s Indetermination Principle: the closer you observe it, the more its behavior seems to change.
      This analyst said China’s macros have been “unreliable indicators” for years now, and hence attempts to divine economic trends were based on other indicators, such as container volumes at the Shanghai freight harbor.
      To nobody’s surprise, those data started looking “suspicious” as well after a while.
      While she didn’t use these exact words, most data originating from China are so massaged as to make them nigh on useless to see how the real Chinese economy is behaving.

      The real risk for China right now is their economy risks spinning out of control. The deadly combination of central planning and old fashioned greed is making things extremely hard even for the People’s Bank of China and Communist Party to control.
      Take the Shanghai stock exchange for example: the PBOC has no problem with it soaring to unheard of heights every day, but they’d like it to so according to their whims. The index dropped 6% on Friday and gained 7% on Monday: hardly the sign central planners are still fully in control.
      And let’s not even speak about housing: given the lousy interest rates Chinese banks have been paying for almost a decade now, Chinese families have piled into it. To say there’s a supply glut in the sector would be a mild, politically correct statement. Those apartments won’t turn into piles of cash anytime soon.
      We often speak about millions of empty apartments waiting a buyer, but there are far more owned by somebody hoping to unload them upon somebody else, at a hefty profit of course. Chinese have fallen prey to what I call “the Italian malady”, namely that housing is a blank check, with probable catastrophic results.
      Chinese central planners like to act tough on the outside, but in reality they are prone to give in when people start grumbling: social peace through prosperity and all of that.
      Problem is how to rescue those fools who bought luxury apartments (by Chinese standards) hoping to unload them upon coal miners and rice farmers. There’s no easy way out. Make loans easier to access and the Chinese debt problem could become the Chinese debt disaster. Institute mandatory minimum prices for housing and the housing bubble by central planning could literally bend time and space. Allow prices to stabilize and China could well experience two lost decades due to her overdependence on housing… with a phony 6% yearly GDP growth.

      • Mike R.
        Apr 21, 2015 at 11:59 am

        I think your comments/analysis is spot on.
        When things get really bad over there, the Chinese government will use any/all combinations of police force, financial repression but mainly money printing. They will have to inflate.

    • Vespa P200E
      Apr 21, 2015 at 10:51 am

      Obamao’s admin has learned how to hoodwink and “shanghai” the economic data from his dear comrades.

      As for China’s economic and for that matter any numbers that comes out of politburo – it’s all made up many times over as local comrades manipulate the data to make themselves look good followed by regional, provincial, etc, where by the time it reaches the liar’s den it got magnified many times over.

      I mean if the China economy is doing so well then why are there debt defaults even from state owned enterprise/companies and their CB is covertly unleasing rounds of QE via lowering bank reserves?

      BTW – I was in south China (Shenzhen and Zhuhai) in Dec of 2008 in gritty industrial towns and there were lot of unemployed factory workers on the street waiting for long distance buses. Heck even the KTV and saunas vices biz were hawking for customers outside which is pretty rare with 50% off coupons for sauna happy hours (1 to 3 PM for relaxation to work off lunch and just in time to show your face in the office before leaving for another lavish dinner and KTV).

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