The Hindu Business Line : Fall in container ship charter rates

Could the downturn in container ship charter rates be an indication that the three-year rally in container shipping finally might be levelling off? Perhaps not. If anything, the present weakness is a flash and the rates are likely to bounce back.

TWO weeks ago, we published a news item in the In Brief column of this page that the Howe Robinson weekly index measuring container ship charter rates, one of the industry's main benchmarks, recorded its first drop since December 2003 as the London broker recorded lower daily hire rates for mid-sized vessels.

But, then, the Howe Robinson weekly index was not the only index to report the decline in container charter rates in so many months. H. Clarkson, another leading London broker, also reported the downturn in its index tracking prices of new ships since September 2002. The decline affected most types of vessels, including container ships. Clarkson quoted $61 million for a 3,500-TEU vessels compared to earlier $63 million.

Another index run by London-based Braemer also recorded a drop for two successive weeks after doubling over the past two years.

Do all these indicate that the three-year rally in container shipping finally might be levelling off? Perhaps not. Most brokers are confident that the market will continue to be firm and, therefore, rule out an imminent retreat from current record high charter rates in the near future.

If anything, the present weakness is a flash, as the rates, despite the fall, are still within close range of all-time highs and likely to bounce back after the traditional summer lull. For example, the daily rates for a benchmark 1,700-TEU geared vessel have dropped by just $500 and, at $32,000, are nearly four times the level in 2002, before the market rally began. A 3,500-TEU gearless Panamax vessel is fetching more than $43,000, which is lower by a meagre $750 since April, but three times more than what it was in 2002.

One reason for the apparent drop in container charter rates may be the recent arrival of a few vessels on the spot market, which for long had been hit by an acute shortage of tonnage. But such arrivals need not lead to any tremor in the market. The container ship operators seeking extra tonnage to handle increasing volumes in the coming months have been warned by experts not to rely too much on the charter market as a source of acquisition.

According to them, few container ships of 3,000-TEUs capacity and above will be available for charter hire in 2005. An estimated 20 vessels of 3000-4000 TEUs are likely to be freed from the present charter during the course of the year but the existing charterers will rehire most of them.

Interestingly, a near firmness in container charter rates persists even as the container freight rates show a downward trend, despite the rate restoration initiatives (RRI) by the member lines of various conferences and shipping cartels from time to time. Take, for example, the India/Pakistan/Bangladesh conference covering the trade route from the Indian subcontinent to the UK/Continent.

For the past couple years, the conference has been systematically announcing freight hikes in the form of RRIs every quarter. If all the initiatives had yielded the desired results, the market rates would have gone through the roof. But that has not been the case, with rates hovering around $1000-1200 per TEU. The same is true about the freights rates in several other sectors.

Can charter rates remain buoyant even if the freight rates remain depressed for long?

The present slump in freight rates, according to many, is seasonal. The downward trend will be reversed as soon as the summer lull is over. This happens every year. Also, the global container trade will grow more than the capacity. According to one estimate, the global container trade is to grow between 11.2 and 11.4 per cent in 2005, which is comfortably ahead of a 9.8 per cent increase in capacity. However, the situation may not remain so in the long run.

The number of container ships at the end of 2007 is expected to rise to 4,271, up from 3,362 at the end of 2004, according to experts. More important, during the period, the construction of ships of the capacity of more than 4,000 TEUs each is to rise by more than 21 per cent while that of smaller vessels, i.e. less than 4,000 TEUs capacity each, by only seven per cent or so.

The economies of scale to be offered by mega ships will bring down the unit cost, thus holding out the chance of further drops in freight rates. Can the charter market hope to remain firm even in such a situation?

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