Low vessel utilization will fuel rate decline

Sea Intelligence had been looking at the development of nominal vessel utilization, as this is a key parameter in gauging the strength of the market. In a recent article, it concluded that even though demand grew by 0.6% Y/Y in June, it doesn’t change the fact that it has been on a downwards trend ever since it spiked in peak season 2020.

The more pertinent question therefore, is how demand growth matches up against deployed capacity. A declining demand trend can be offset by a declining injection of capacity, especially in an environment where port congestion leads to significant vessel delays, and in turn results in capacity removal.

When we look at capacity deployment on the major East/West trades, we can see that while demand growth is slowing, capacity growth is increasing at the same time. For Transpacific, the drop in vessel utilization is shown in figure 1. The sharp drop in May was sustained in June as well, with vessel utilization around the 89% mark.

There is a correlation between vessel utilization  and spot rates on the Transpacific. Basically, once utilization  gets into the 90-95% range for the Transpacific, it effectively means all capacity is fully utilized and spot rates increase dramatically. However, now that we have had 2 consecutive months where utilization  is below 90%, it is clear the market is no longer at a point which can sustain the extremely high spot rates. We also see a similar case on Asia-Europe and Transatlantic as well.

The bottom line is that the average vessel utilization on the major head-haul trades continues to be below the threshold which fueled the record rate peaks over the past 1½ years. As a consequence, spot rates will continue to decline.

Source: sea-intelligence.com

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