BY DAVID HUGHES

OVER the past couple of years, very high container shipping freight rates have prompted cries of anguish from the shipper community and even led to the US Congress passing a bill &ndash with rare cross party support &ndash aimed at preventing alleged profiteering. 

In vain did commentators, including the writer of this column, point out that liner shipping had in general either yielded very thin profits or was loss making from the early years of containerisation. This drove the consolidation of lines which has since taken place. The low profitability of liner shipping was in large part due to the insistence of competition authorities that liner shipping companies must lose their exemption from anti-cartel laws that allowed, within limits, price setting agreements. 

The result was that the liner shipping market became much more volatile and would have been highly cyclical &ndash as the tramp shipping dry cargo and tanker markets are. But until recently, persistent over ordering of new and ever larger tonnage prevented any real highs in the market and kept rates low.

That changed about 2 years ago when rates started to soar. The good times for the liners lasted surprisingly long but recently, there have been a steady stream of reports indicating a downward trend.

Two short papers from HSBC Global Research have attracted my attention in the past couple of weeks. The bank&rsquo s Parash Jain, head of Shipping & Ports & Asia Transport Research, noted that container rates in South-east Asia declined the steepest in the quarter to date, &ldquo likely due to cascading of capacity from long haul routes&rdquo

In the most recent paper,  When the tide goes out..., Jain pointed out that the Shanghai Containerised Freight Index (SCFI) recorded another steeper decline of 9.7 per cent week-on-week in the week of Sep 2, and is now down 32 per cent quarter-to-date or 37 per cent lower year-on-year. The China Containerised Freight Index (CCFI) showed a milder decline of 2.5 per cent week-on-week, thanks to the cushion from higher contract rates, still staying at 4 per cent higher year-on-year in the third quarter to-date.

The first paper,  Back to Earth, had warned that as vessel utilisation declines from between 95 and 100 per cent, the current skyrocketed spot freight rates could lose support quickly and revert to a more normalised level. The second paper predicted: &ldquo We maintain that spot rates could fall another 58 per cent in 2023, and 37 per cent in 2024 on average before reaching the bottom.&rdquo

It observed: &ldquo Quantifying the extent of the looming down-cycle: Freight rates have peaked and a down-cycle in 2023-24, driven by overcapacity, seems inevitable. The debate is over whether the sector has learnt any lesson or will return to losses. There are signs that spot rates could fall to pre-pandemic levels swiftly on the widening demand-supply gap but we maintain that contract rates should settle above their pre-pandemic levels and that capacity discipline will keep spot rates from lingering at trough levels. Overall, we expect the sector to remain profitable versus losses pre-pandemic.&rdquo

That prediction about staying profitable says a lot about liner shipping. The paper does not say &ldquo highly profitable&rdquo , it just says &ldquo profitable&rdquo and offers that as being better than the generally loss-making situation pre-pandemic. That begs the question why should any one want to invest in a very capital-intensive industry when the rewards are at best meagre.

However another press release that crossed my desk recently had a more optimistic message, at least for a segment of the container shipping business. While spot rates for dry standard FEUs (40 foot equivalent units) are declining on the world&rsquo s key global trading corridors, the rates for equivalent reefers are bucking the trend on the North Europe to Far East route, noted shipping analyst Xeneta. It crowd sources real-time ocean freight rate data from major shippers. It found that the average 40ft HC reefer spot rate stood at US$5,230 for the trade on Aug 23, compared to dry standard FEUs at US$980. At this point 2 years ago, September 2020, the reefer spot rate was US$4,000. Rates for standard dry containers have been slipping away since June 2021, when they were close to US$2,000.

&ldquo This is interesting for a number of reasons,&rdquo commented Peter Sand, Xeneta&rsquo s chief analyst. &ldquo One is the steady increase, albeit with a dip in August, in the reefer spot rates but also the fact that the spot rates are still above the long-term contracted agreements is noteworthy. That said, the long-term rates have also been increasing steadily (currently US$4,850) and the spread between the 2 is diminishing. In fact, that divide is now at its narrowest since November 2019, so we&rsquo ll be looking out to see if &ndash as on some other trades &ndash the spot rates fall below the contracted ones. When we consider the recent development curve, that wouldn&rsquo t be too surprising as long-term rates have now climbed by an impressive 14.5 per cent since the start of the year.&rdquo

However, while the reefer sector may continue to do very well for some time, it is difficult to avoid the conclusion that the party may be almost over for the container shipping industry. Before too long, the lines are likely to be back to small returns on massive capital investment once again &ndash if they are lucky.