We are without a doubt in one of the strongest bull-markets for the container carriers seen in the last few decades, with container rates on many trade lanes setting records week after week. But how long will this last? The answer to this question is incredibly important for anyone – shipper and carrier alike – trying to plan more than just a few weeks into the future in the current market environment. 

However, the most honest answer to the question right now is that no-one knows this for sure.

The container shipping supply chain is comprised of a large number of elements, and presently virtually every single one of the involved components is finding itself in a state of turmoil. Getting the market to a normal level of predictability and performance will take an unknown amount of time. 

The trigger for this level of uncertainty is of course the pandemic which in turn has dramatically altered consumer behavior – again leading to an impact on container shipping volumes. This impact has not only been both negative and positive in 2020, but it has also shifted with a speed not seen previously. The magnitude and speed with which the consumer behavior – and hence impact on the container markets – will change in 2021 is exceedingly difficult to predict given that all modelling of this is quite literally virgin territory.

Seeing beyond the immediate issues related to the pandemic, it would be erroneous to believe that once the pandemic is over then the container markets would become stable and predictable. There are two key reasons for this.

The first reason is that the container shipping market has always had a relatively high level of unpredictability. Whenever there are large changes in market elements, this tends to draw headlines. But unfortunately, this often also leads to the perception that large changes are an anomaly – a unique and rare event. The reality is that these changes are more frequent than market participants appear to give them credit for. 

As a few examples, it is the norm and not the exception that spot rates in key markets change by 50-100% or more between the low and high point within a year. It is the norm and not the exception that schedule reliability changes more than 25 percentage points within a year on most deep-sea trades, and it is increasingly the norm and not the exception to see cancellations of individual sailings.

Structural development in the industry will act to enhance these uncertainties and not necessarily reduce them going forward

The second reason is that the structural development in the industry will act to enhance these uncertainties and not necessarily reduce them going forward. 

As a consequence, we might well see a gradual market shift – in essence a bifurcation – towards a more volatile spot market on one hand and a more stable contract market governed by enforceable contracts. For shippers who wish to manage their market risk, this will result in a challenge. Even the most structured shippers cannot accurately predict their volume flows up to a year in advance. Especially not at a port level as both customer demand, as well as sourcing locations, might change. This, in turn, means that they will be able to secure only the most predictable part of their demand in a strict contractual framework but be left to the increasing uncertainties of the spot market for the rest. 

For those shippers, it is therefore worthwhile to consider how to re-address risk management to find the correct balance between the need to know future costs, the need to be able to move product reliably, and the need to be able to shift sourcing locations and address changes in consumer demand.

 

 

About Lars Jensen, CEO, SeaIntelligence Consulting

 

Lars is a leading expert and thought leader in analyzing global container shipping markets. Lars has 19 years’ experience hereof the last nine within multiple companies he has founded, with the main focus as CEO of Seaintelligence Consulting.