Ocean carriers would seem to hold all the cards in contract rate negotiations as controllers of much needed and often tight capacity in an industry with antitrust exemption. Now, after several years in a buyer’s market with no end in sight, the reality is somewhat different.
Shippers have the leverage to secure container capacity at reasonable rates, and often below market value. Although this may not play out in the same extremes in the still-profitable transpacific trade lane as in the low-down Asia-Europe trade, carriers will still be at the mercy of the market when it comes to setting rates for 2016, and we predict the market will not be kind.
The primary reason for this? In a word: overcapacity, which has gone from a persistent issue to a fundamental facet of the ocean shipping industry. Because capacity, which represents supply in the market, grew far faster than volumes, which roughly represents demand, rates have been driven to near-historic lows as carriers raced to the bottom to preserve their market share.
The International Monetary Fund in January again downgraded its global growth projection for 2016, projecting the global economy will grow 3.4 percent this year, and the Chinese government recently reported its gross domestic product (GDP), the broadest measure of an individual country’s economy, grew 6.9 percent in 2015, down from 7.3 percent in 2014 and the lowest in 25 years. This will be of particular importance to transpacific carriers as China is the largest exporter of containerized cargo, but in both cases, slowing global economic growth would only compound issues for ocean carriers.
Shippers in the current market climate will benefit from a glut of capacity and fierce competition that should continue to drive rates further downward. In other words, if you don’t like the price one carrier gives, another will likely be willing to beat it, possibly even on the same exact service.
The American Shipper 2016 Transpacific Container Rate Negotiation Primer gives readers an in-depth look into the current container market, rate expectations for the rest of 2016, and some suggested steps for shippers as they wrap up the spring negotiation season.
Projections for 2016. According to Xeneta, an Oslo-based company that provides container freight rate benchmarking and market intelligence, long-term contracted global container rate data confirms further expected rate decline in 2016. It’s important to note that this is not based on projections or historical trends, but actual contract rate data for 2016 coming into Xeneta’s confidential crowd-sourced software platform.
Aggregate spot container rates as measured by the Shanghai Containerized Freight Index in January had fallen about 25 percent to 32 percent from the same month last year and closer to 37 percent compared with January 2013. By March 18, the SCFI had dropped another 46 percent, with transpacific spot rates tumbling to $761 per FEU from Shanghai to the U.S. West Coast and $1,659 per FEU to the U.S. East Coast.
London-based shipping consultant Drewry has predicted that due to the continuing rate decline, container carrier losses will exceed $5 billion in 2016. Drewry estimates the global containership fleet comprised around 5,200 vessels with an aggregate capacity of 19.8 million TEUs in 2015 and that number will reach 20 million TEUs within the next few months, four times what it was back in 2000.
Takeaways. According to BlueWater Reporting, deployed capacity in the eastbound transpacific trade grew 7.6 percent in 2015 as new ships were delivered and put into service. As illustrated in the adjacent chart, transpacific deployed capacity increased from around 3.2 million TEUs in January 2014 to 3.4 million TEUs currently. That’s a 17.7 percent jump since January 2013, when carriers deployed around 2.9 million TEUs.
Recent estimates suggest more than 1.6 million TEUs of capacity were delivered across all trades in 2015 and the global container fleet is expected to increase at least another 3.5 percent this year. This will depend, in part, on whether carriers decide to delay delivery of ordered vessels to artificially suppress capacity growth in an attempt to keep supply in line with demand.
It follows then, if there is already way too much capacity in the market, something even the ocean carriers have admitted at this point, and capacity growth is expected to again exceed GDP growth in 2016, this is a recipe for disaster for the carriers. For shippers, on the other hand, this is the perfect time to negotiate rates that keep their costs at an acceptable level for the foreseeable future.
The only real risk is locking in rates now. They might actually fall further as the year goes on.
Meyer is web editor of American Shipper and a research analyst with BlueWater Reporting. He can be reached by email at bmeyer@shippers.com.