Demise of freight

25 July 2016

The global freight market sees the trading and chartering of the world’s merchant shipping fleet. The use of vessels is sold on the basis of time, voyage or freight charter with a number of other options negotiable from the degree of control of the ship to the responsibility for crewing and maintenance.

The market is a key part of the global economic system with around 80% of all internationally traded goods and commodities carried at some point by a ship. In 2013 the world’s ships carried over 9.6 billion tonnes of cargo, a record volume for seaborne trade. 

However, the market is a vast, complex one where rates can fluctuate wildly as they are buffeted by a bewildering array of variables. In recent years circumstances have converged to send the rates of charter plummeting from a high of USD 200,000 a day in 2008 to under USD 5,000 a day at present. 

Shipowners and operators are at the mercy of this extremely volatile environment, which has been exacerbated by an over-supply of vessels. Freight rates can fluctuate for many reasons, including commodity demand, seasonal pressures and oil price movements. 

However, it is the excess tonnage currently plying the world’s oceans in a global merchant fleet size numbering approximately 55,000 and continuing to grow that is at the heart of the issue. 

A lack of scrap value has seen older ships utilised for far longer than previously. Meanwhile the production line of new, ever larger, freight vessels being built mainly in China and Korea takes just three years to complete a new mega-ship. 

For those chartering vessels, the fact that it now costs less than USD 400 to move a 40-foot container from Shenzhen to Rotterdam, which is barely enough to cover the cost of fuel, handling, and Suez Canal fees, presents an opportunity. They can charter vessels for less and increase the profitability of their trading. 

It also means that it is cheaper to store USD 1 million-worth of cargo on a vessel anchored off the coast rather than use an onshore warehouse. Something many traders are taking advantage by creating strategic floating storage facilities. 

However, these rates are unprofitable for shipping lines. And although the bigger shipping lines are able to absorb the losses, a number of the Greek shipping lines are struggling with the country’s wider economic travails adding to the problem. 

“From a trading client point of view the current freight rates are a thumbs up, but when you’re running ships as cheaply as shipowners currently are things like safety and other things can be overlooked. If you’re not making as much money on your fleet of vessels you’re going to have less money to invest in the undertaking safety checks and employing the right crew,” says Jay Payne, Senior Partner in the Cargo team at JLT Specialty. 

The increased volume of older vessels in the freight market as well as question marks about the quality of materials and workmanship on the new ships means charterers should be selective over the tonnage they use. 

Fortunately the over-capacity in the freight market means traders can be choosy even at times of greater seasonal demand, such as the Australian grain harvest.

Download Cargo Newsletter 

For further information, please contact Jay Payne, Senior Partner on +44 20 7466 6236 or jay_payne@jltgroup.com

YOU MAY ALSO BE INTERESTED IN