From the perspective of the big cycle, where will the container shipping freight rate go?

Source: Yunlian Think Tank (ID: tucmedia)

Author: Cheng Xianhe, Yunlian Research Institute

Edit: Little L

Recently, Zheng Zhenmao, chairman of Yangming Shipping, publicly stated that the downturn of the container shipping industry may continue; At the same time, because the state of oversupply will continue for a long time, shipping companies must be prepared for a long-term war of resistance.

The container shipping market is likely to fall into a long downward period. From the perspective of the "big cycle" that shippers often talk about, what stage does it belong to? What are the factors driving the change in freight rates? What will happen next?

1. The four-stage cycle constitutes the main line of development of the container shipping industry

As we all know, container shipping is a long-term cyclical industry. From the success of the first container voyage practice in 1956 to the present, there have been four major cycles of freight rates. From the first major cycle to the present, in the process of each cycle fluctuation, the industry has shown two characteristics: industrial layout orientation and capacity supply and demand orientation.

1.1 It took only 20 years for freight rates to go from high to plummeting

The first cycle of freight rates from the 50s of last century can be described as "debut is the peak", which is the result of the scarcity of supply in the blue ocean market and the two-way promotion of demand driven by economic recovery after World War II, and the serious imbalance between supply and demand.

In 1956, a converted ship called the Ideal-X sailed out of Newark Harbor and arrived at the Port of Houston. This voyage realized the first real sense of container shipping, truly demonstrating unprecedented loading and unloading efficiency and cost optimization effect.

What is more valuable is that the efficiency improvement benefits of container shipping are not only limited to shipping and port scenarios, but also spill over to land transportation scenarios. At this time, container ships and containers themselves were still "new", and the initial supply was very small. At the same time, under the shadow of the Cold War, the post-war global political and economic pattern and industrial layout began to undergo drastic changes. Since then, container shipping has opened the first cycle.

In the context of the United States and the Soviet Union seizing the post-war sphere of influence, marked by the US-led Marshall Plan to Aid Europe, the economic and industrial recovery of Western Europe was on the fast track. In addition, based on the deep industrial facilities of Western European countries and the high-quality industrial workers, the complementary industrial layout and trade exchanges between the United States and Europe are increasingly prosperous.

Almost at the same time, with the support of the United States, Japan's industrial economy began to rise, which in turn triggered the growth legend of the "Asian Four Tigers" in the 60s. In this process, the world's manufacturing center gradually shifted from the United States to East Asia. Behind this is the reallocation of various factors of production on a larger geographical scale.

Whether it is the rapid recovery and rise of the Western European economy, or the transformation of East Asian manufacturing from small to large and from weak to strong, it is based on more convenient and efficient international trade in goods. Among them, the birth of container shipping is just in time. As an unprecedented and efficient means of cross-border transportation, it has played a mainstay role in the above-mentioned post-war industrial chain reconstruction process based on the Cold War pattern.

Over time, the boom in container shipping began to end with the great stagflation of the 70s. In this process, the US-Soviet hegemony gradually entered a white-hot stage characterized by all-round competition, and in the extreme confrontation between each side and each other, both sides made relatively serious mistakes in both industrial policy and economic development strategy.

Among them, the unprecedented stagflation crisis that broke out in the 70s in the United States and Western economies is the most dangerous. Whether it is the collapse of the gold standard or the severe impact of the two oil crises, it is reflected in the global manufacturing layout, which is reflected in the slowdown in the speed and frequency of cross-border circulation of production factors and the decline in global consumer demand behind it.

Since then, container shipping has entered the first recession stage since its birth, that is, the closing stage of the first freight rate cycle.

1.2 Out of the global economy of stagflation, the second cycle of container shipping for 20 years has begun

In 1981, the 40th President of the United States, Ronald Reagan, came to power. At the same time, the extremely repressive 70s seemed to spontaneously embark on the road of self-regulation. Coupled with the liberalization reforms led by the Reagan administration, which further stimulated the market to boom, the US economy and the US and Western economies under its influence began to gradually get rid of the quagmire of stagflation.

With the gradual recovery of the industrial economy, the global layout (globalization) of production factors with the search for value depression and cost depression as the core appeal has begun to become the mainstream. China reopened its doors at the right time, advocated opening up, fully released its own demographic dividend, and quickly undertook global industrial transfer.

Coupled with the formation of Japanese manufacturing and the geese array pattern led by it, the East Asian manufacturing market presents a thriving scene. Although the Japanese economy has entered a "lost thirty years" since the end of the 80s, the general trend of the entire low-end manufacturing industry from the United States and the West to East Asia has not been interrupted, but has become more stable. During this period, we have seen the rapid development of China's economy and the gradual consolidation of its position as the world's factory.

Until the outbreak of the Asian financial crisis in the late 90s, the second stage of container shipping prices experienced a complete cycle from soaring to a sharp decline in a short period of time.

Whether the price rises or falls sharply, behind it is still the dominance of globalization: the rise in container freight rates, fundamentally speaking, thanks to the production factors promoted by the new stage of globalization, the global layout process in an unprecedented time and space range. Similarly, the sharp decline in freight rates at this stage is also due to the collapse of the manufacturing industry in emerging economies triggered by the Asian financial crisis, and the loss of investor confidence induced by it.

(Asian financial crisis)

1.3 The continued deepening of globalization has become the leading force in the third cycle of container shipping

With the gradual dissipation of the impact of the Asian financial crisis and China's accession to the WTO as an emerging manufacturing powerhouse, continuing the inertia of the second round of globalization since the 80s, emerging economies represented by China have sprung up.

Until the outbreak of the subprime mortgage crisis in the United States around 2008, driven by the sustained high-speed growth of emerging economies, raw materials, intermediate goods and finished products continued to rely on shipping, especially container shipping, to flow rapidly around the world and create rapid growth.

Among them, the raw materials represented by China and the "world factory" model of the market "at both ends" make the international supply chain more complex and diversified in geographical space and transaction time, fundamentally increasing the volume of international trade.

On September 15, 2008, Lehman Brothers, a 158-year-old veteran investment bank in the United States, collapsed, opening the domino effect in the financial field. Since then, the term "subprime crisis" has immediately become the focus of public opinion and an indelible mark of the times, and its negative impact continues to this day. From this point on, the world economy reversed its upward trend, replaced by declining economic growth expectations and persistently low investor confidence. As the mainstay supporting the global economy, the manufacturing industry is naturally unable to escape the growth and even survival pressure brought by the downward cycle.

As a result, the third cycle of container shipping began to enter a downward phase. During this period, the layout tone of global manufacturing production factors began to shift from "cooperation" to "competition".

1.4 The transformation and upgrading of manufacturing in emerging economies represented by China has driven the changes in freight rates in the fourth cycle

In the context of the diminishing impact of the subprime mortgage crisis and the rising nature of competition between emerging economies represented by China and developed economies, international trade has begun to show a wave of anti-globalization.

Marked by the trade frictions with China launched by the Trump administration in 2018, international trade in goods has completely entered a new stage of comprehensively testing whether the manufacturing chassis of various countries is stable and the resilience of the supply chain is strong.

In this process, based on the division of labor in the global value chain since the last century and the construction of the major industrial countries' own competitive barriers, the "naked swimmers" began to withdraw from the market. Major industrial countries with complete industrial categories, deep industrial foundation and complete industrial supporting facilities have more significantly demonstrated their super supply chain resilience under the severe situation of continuous intensification of international competition.

Emerging economies with industrial autonomy represented by China have not only resisted the foreign trade pressure brought about by trade frictions, but also accelerated the pace of transformation and upgrading of their own manufacturing industries. The resilience-based global supply chain has been able to form a relatively steady state on a competitive basis at this stage, resulting in overall stability and slight growth in container freight rates.

At the beginning of 2020, the quiet years of freight rates were interrupted by the global outbreak of the new crown. The global supply chain has been constantly fluctuating under the torment of the new crown, and container freight rates have shown abnormal growth in spurts. Since it is abnormal growth, it is doomed to be unsustainable.

Just as the so-called success is also Xiaohe, defeat is also Xiaohe, the spring of the shipping industry catalyzed by the epidemic has also come to an abrupt end as the epidemic subsides. And thus opened the downward phase of the fourth cycle of container shipping, until today.

2. The so-called "cycle" is the product of the joint action of two layers of supply and demand

Based on the above discussion of the four cycles of container shipping, we can vaguely experience that there is a visible "hand" and another invisible "hand" that never leaves.

The change in supply and demand between capacity supply and cargo volume, as a visible "hand", always directly determines the change of container shipping price. Over a longer time horizon, real-time co-directional fluctuations in prices together form a so-called long cycle.

And behind the visible "hand", there is also an invisible "hand" that controls everything.

2.1 Based on the change of capacity supply on the surface, the change of container freight rate is directly determined

All upward and downward ranges throughout all cycles are directly determined by local or global supply changes in containers, ship capacity, port capacity and other factors.

Taking the soaring container freight rate during the outbreak of the epidemic as an example, it is precisely because the circulation and reuse of containers as mainstream vehicles around the world has been blocked, resulting in insufficient supply of empty containers at shipping ports, and excess empty containers at mainstream import ports, piling up. Coupled with the shutdown of major ports caused by the epidemic, a surge in container freight rates with the mismatch of capacity supply and shipping demand as the leading factor has been formed, with the imbalance of local container supply and demand as the main feature and the global supply chain fracture as the final result.

At the same time, the impact of capacity supply on freight rate changes is not limited to the here and now, but also extends to the next round of long-term price negotiations and spot freight rate estimates. It can be said that the visible "hand" - the shipping price cycle, as a direct operator, has shaped the container shipping cycle dominated by the contradiction in the supply of the above four major container shipping capacity.

2.2 The invisible "hand" - the global layout change of the industrial chain, which has a fundamental impact on the cycle through the contradiction of capacity supply

Behind the change in capacity supply is the judgment of shipping companies, container manufacturers and charterers, and port operators based on the prospects of global economic development, especially the fundamental changes in the world's major industrial countries and consumption areas.

In the process of changing the global layout of the industrial chain, there are two main lines that fundamentally shape the formation of the container shipping cycle.

First of all, the changes in the consumer supply chain and the continuous evolution of the demand for terminal consumer goods directly form the fluctuation cycle of cargo volume, which in turn guides the above-mentioned shipping participants to adapt to market changes by adjusting the capacity supply and creating the formation of the container shipping cycle.

Secondly, it is the change in the layout strategy of the production supply chain on a global scale, which triggers changes in capacity supply and ultimately shapes the container shipping cycle through changes in cargo volume within a certain region or globally.

3. Following the domination of the two "hands", the current container shipping price is still in the downward stage of the fourth cycle

Under the combined effect of capacity replacement and continuous addition, and the global economy mired in inflation, the current container freight rate has not yet reached the bottom. Coupled with the increase in uncertainties, market confidence has been further eroded.

As a result, container freight rates will fall over a longer time frame or hover at low levels.

3.1 The continuous launch of new capacity will intensify the zero-sum game in the container shipping market

Since the peak of container freight rates, the shipbuilding enthusiasm of major container shipping companies has increased. The market presents a contradictory situation in which frequent routes are cut while continuing to increase shipbuilding efforts. In fact, the so-called contradiction is only the appearance, behind which the major shipping companies are trying to seize more market share by intensifying the contradiction between supply and demand of shipping capacity, compared to who died the latest.

In addition, stimulated by global economic expectations and continued sluggish consumer demand, major shipping companies have extended their tentacles upstream and downstream, no longer satisfied with just playing the role of trunk line "carrying", trying to include more supply chain value points.

Among them, the most aggressive performance is the world's second largest shipping company, Maersk, through the continuous acquisition of upstream and downstream high-quality logistics assets, extending its business tentacles to the high value-added end-to-end logistics fulfillment market including cross-border e-commerce logistics, air cargo, and digital freight forwarding.

Therefore, the improvement of capacity and solution supply capacity is shaping the downward cycle of the container shipping market under the current oversupply and demand with an unprecedented global attitude.

3.2 The wave of anti-globalization has put pressure on international supply chains for a long time

In addition to the continuous excess of capacity supply, as an invisible "hand", the change in the layout of the international supply chain is still the fundamental reason shaping the current downward cycle.

The stubborn inflation in the developed economies of Europe and the United States, as well as the increase in uncertainty represented by the Russia-Ukraine conflict, are eroding the deepening foundation of the global layout of the manufacturing industry on which the international supply chain depends.

Specifically, developed economies have begun to consider and implement nearshore supply chain strategies based on so-called national security, and have tried to reduce or even eliminate the dependence of their own supply chains on China. At the same time, the "trade war" has continued to this day, and even spawned new anti-globalization battlefields with strong new cold war colors, such as science and technology wars.

As a result, the shrinking overseas consumption and industrial manufacturing fundamentals and the new layout of the artificial global supply chain are reducing or affecting the local and global cargo volume layout and growth expectations represented by the trans-Pacific route (Sino-US trade). The change of the absolute value of container shipping volume and the change of cargo volume distribution as the transmission terminal of the above changes in the international supply chain, respond to the downward trend of freight rates and mark that the global manufacturing industry will be in the recession range for a long time.