Meanwhile, just this Friday, the Shanghai Shipping Exchange said its Shanghai Containerized Freight Index declined 6.2 percent from last Friday’s reading of 670.29 to a reading of 628.59.
Ocean shippers have seen freight rates plunge for several years, but should be wary of a rebound, according to analysts from the shipping consultants at Drewry.
“I think everybody will agree that this year has been exceptional in terms of some of the crazy developments of freight rates,” said Philip Damas, director of Drewry Supply Chain Advisors.
Drewry’s Benchmarking Club, a closed user group of very large multinationals who contribute their contract rates and benchmark against them, provides a window into what is happening with contract rates, Damas said. The Drewry Benchmarking Club East-West Index, which Damas said is a good proxy of contract rates, tumbled by about 29 percent year-over-year in the second quarter of 2016.
“That takes into account the very considerable rate reductions that we saw in the new transpacific contract in May,” he noted. Many beneficial cargo owners negotiate annual contracts in the eastbound transpacific trade for “contract years” that run from May 1 to April 30.
Damas said rates being negotiated are not sustainable because carriers are losing money.
“That is the warning we would like to share with you, and it could be an important message for your senior management–if you are a shipper, the contract rates will go up,” he said.
However, he added that surplus capacity “will contain the speed and quantum of future rate increases…they will not double or triple, but they will certainly go up.”
In the spot market, Damas noted there has been “huge volatility” in the Asia to Europe trade with an “extreme rate war” and lower bunker costs pushing spot rates down to as little as $300 for a 40-foot container at the beginning of 2016. More recently, there have been some very large general rate increases and some capacity cuts. While competition in the Asia to Europe trade is still fierce, because load factors are relatively high, rate hikes are sticking.
There has been less volatility in the Asia to U.S. trade, but still some very low rates until recently when he said there has been the start of a correction. He pointed to capacity reductions in the transpacific by both the G6 and Ocean 3 alliances and some large general rate increases in the transpacific.
On Friday, the Shanghai Shipping Exchange said its Shanghai Containerized Freight Index (SCFI) declined 6.2 percent from last Friday’s reading of 670.29 to a reading of 628.59.
Rates from Shanghai to Northwest Europe fell 8.1 percent, from $776 per TEU to $713 per TEU, while rates from Shanghai to the Mediterranean tumbled 12.4 percent, from $758 per TEU to $664 per TEU.
However, major ocean carriers such as Maersk Line of Denmark, France’s CMA CGM and Hapag-Lloyd of Germany are looking to increase rates on both trades starting Aug. 1.
Meanwhile, rates from Shanghai to the U.S. West Coast fell 8.8 percent since last week, from $1,421 per FEU to $1,296 per FEU. Rates from Shanghai to the U.S. East Coast slipped 6.8 percent, from $1,871 per FEU to $1,744 per FEU.
On the backhaul trades from Europe to Asia and the U.S. to Asia (which are not included in the SCFI), Damas said rates have been less volatile, but they have still continued downwards because of weak volumes to Asia.
“We have seen volumes from the U.S. to China, in particular, becoming weaker and weaker and we understand this is to do with China importing fewer raw materials from the U.S. which has to do with the strong U.S. dollar which is making some US exporters less competitive against other exporters. So volumes are keeping rates quite a long way down,” he said.
However, there has been a partial upward price correction in April and July, he said. In the Europe to Asia trade, there hasn’t really been an upwards correction.
He said the Drewry Global Container Freight Rate Index, an average of rates on many different routes other than the intra-Asia trade, shows a “very rapid and deep reduction in rates since 2014” to the point where global rates in March were only half of the long term average.
Damas said Drewry warned those rates were not sustainable and that between March and June, rates increased about 12 percent. Damas also pointed out that rates in the first half of 2016 were about 29 percent lower than in the first half of the last year.
“So clearly something is happening,” he said. “We reckon that this means that global rates have bottomed out.’
In the intra-Asia trade, which Damas said is the world’s largest container trade, rates are continuing to decline and are about 10 percent lower than last year. He said there has been “no bottoming out yet” and that “rates continue to decline and in June they moved to a new low of only $730 per 40-foot container, including two terminal handling charges.” This means the freight rate is “incredibly low,” he said adding that Drewry has evidence of intra-Asia carriers charging zero base rates or $20 base rates.
In contrast, Damas pointed to the trade from China to Brazil where rates have suddenly spiked upwards after falling over an 18-month period. Rates increased 450 percent between February to June. Still, he noted, rates are only back to the levels they were at in late 2014.
“This is a realty rather an exceptional case which could be an example of what could happen on other trade routes,” cautioned Damas.
Rates rose after carriers took out approximately 30 percent of capacity, and he said there are only half as many weekly services between Asia and the East Coast of South America as there were a year ago. However, rates continue to slide between Europe and Brazil, where capacity has not been cut.
“If you are a shipper, be very watchful and expect that this type of behavior, this change in behavior could happen on other trade routes,” said Damas.
Neil Dekker, head of container research at Drewry, said global container handling growth totaled just 1 percent in 2015. Dekker projects growth of just 1.8 percent in 2016. Trade was weak on the Asia-Europe trades last year, he said, in part because of the sanctions against Russia and various businesses in the Ukraine, as well as to Latin America.
Drewry said the world container fleet grew 8.4 percent last year to a capacity of 19.7 million TEUs after figuring in both deliveries of new ships and scrapping. Drewry projects it will grow a further 3.2 percent this year, 6 percent in 2017, 6.4 percent in 2018 and 4.1 percent in 2019 when it projects the world fleet will reach a size of 23.9 million TEUs.
Carriers ordered ships with 2 million TEUs in the last year, concentrating orders in big ships with capacity of more than 8,000 TEUs, he said, based on the belief that the bigger ships would deliver unit cost savings.
“Thankfully the orderbook has slowed down significantly since October last year,” Dekker said, and the amount of scrapping has increased.
But because of the large number of ships being delivered, Dekker said the “supply side challenge for the industry and the lines in the terms of where they deploy tonnage throughout the system” as well as the cascade of larger ships into many trades “is going to be very, very challenging and severe for next year and even into 2018 as well.”
Drewry: Ocean shippers should be wary of freight rate rebound
