Outlook remains bearish for China's container shipping sector

Average spot rates declined 11% in August.

China's container shipping sector is expected to face a difficult end to the year with freight rates already beginning to decline after the short-term boost from Hanjin's receivership, said Jefferies.

"Given the supply imbalance and nearing end of the peak season, we forecast spot rates decline further," it said.

The Hanjin-receivership boost in container freight rates is over as average spot rates declined -11% since end-August. The decline is driven by -28% decline on the Shanghai-Europe route to only US$699/TEU, which is below breakeven and close to pre-Hanjin filing for receivership level.

Transpacific spot freight rates are faring better due to tighter capacity as transpacific capacity is primarily locked-in via annual contracts, which reduces the spot capacity. Further, Hanjin has higher market share on transpacific (7.6%) than Asia Europe (5.7%). Transpacific spot rates declined marginally (-2%) last week, but, importantly, still higher than pre-Hanjin levels.

However, Jefferies believes that transpacific spot rates is likely to decline as Hanjin-customers have rebooked their cargo to other container while we note that transpacific annual contracts this year were concluded below breakeven.

The research firm also noted that not only are the container lines facing lower freight rates, but margins are also under pressure from the higher oil prices as it believes carriers are unable to pass through the higher oil price to its customers.

Average bunker price has increased 6% since end-2Q16 and 135% since YTD lows in early January.

Jefferies forecasts 2017 to be another loss-making year for the container shipping sector as it predicts net supply growth of 5.1%, with the newbuilt deliveries driven by the +18,000 TEU super-sized vessels as 31 of these vessels are slated to be delivered by end-2017 compared to current fleet of only 42.

However, it noted that the magnitude of the losses depends on the carriers ability, or inability, to control capacity as we expect the container lines to focus on defending or increasing market share through cutting freight rates.

"We maintain our view that the size of the losses rests on their own hands and actions, but we are not optimistic this is possible given recent corporate activity (new alliances and M&A) is likely to lead to market share defending strategies," it said.