Global container shipping rates are high, but unsustainable: Fitch

Spot freight rates will remain high in the short term, which will flow through to contracted rates for 2021.

"However, we consider the current rates unsustainable in the medium term, as the sector is susceptible to rate volatility and risks of weak economic recovery and trade protectionism, requiring constant prudent capacity management," Fitch said on its website.

A combination of rebounding demand for goods in the second half of 2020, supply chain disruptions - such as container box shortages and port congestion - and more strategic capacity management drove container freight rates up, especially on the routes from China to Europe and the US.

Shipping one 40-foot container from China to Europe or the US West Coast now costs over $8,000 and $4,000, respectively, from well below $2,000 a year ago, according to Freightos Baltic Index.

Trade volume recovery was fuelled by a change in consumer spending habits during the pandemic - ordering more manufactured goods while saving by spending less on services, such as leisure and restaurants. It was further supported by inventory re-stocking by businesses that faced acute supply chain disruptions and increased demand for personal protective equipment.

Total volumes shipped from Asia to North America exceeded 2019 levels by over 7 per cent in 2020, according to Container Trade Statistics. A decline in volumes on the Asia-Europe route by about 5 per cent in 2020 indicates growth potential in 2021 as demand recovers.

Container box shortages and port congestion due to pandemic-related operational disruptions have extended container ships' turnaround times, further increasing freight rates. A usually quiet period during the Chinese New Year could have eased some congestion, but demand remained strong as China maintained its production levels.

The ongoing virus outbreaks in many regions and mobility restrictions are likely to keep freight rates abnormally high in the short term.

These higher-than-usual spot rates will translate into higher contract freight rates in the ongoing spring contracting season.

"However, we view rate volatility as an inherent sector risk, and we expect rates to reduce once supply disruptions related to the pandemic are addressed," Fitch said.

Container shipping companies' performance improved in 2020 due to higher freight rates in the second half of 2020, despite lower volumes year-on-year and to prudent capacity deployment during the strictest lockdowns in the second quarter last year.

"We expect the 2021 sector performance to remain sound, with performances of individual container-shipping companies varying depending on their route mix, their proportion of contracted volumes and exposure to chartered fleet, and any further spending on container inventory. Improved profitability led to stronger leverage metrics in 2020."

"Although container shipping companies performed strongly during the pandemic, we believe that the current shipping rates are unsustainable and expect them to moderate in the medium term once supply chain disruptions ease, as the industry is highly competitive."