The container freight market is strengthening as carriers begin some 2017 negotiations, and Drewry said some shippers could see contract rates rise 20-40 percent in worst case scenarios.
Spot container freight rates, which strengthened at the end of 2016, are trending upwards in most, but not all trades, said Simon Heaney, senior manager, supply chain research at Drewry.
That’s good timing for carriers, he said during a Drewry webinar on Tuesday, as they begin contract negotiations with beneficial cargo owners for the coming year. In the transpacific, many contracts run from May 1 to April 30.
The London-based consultant said container carriers lost about $1 billion in the third quarter of 2016, and is projecting a loss for the industry of $5 billion for the year as a whole, in what it said was one of its worst years ever.
After four years of rate reductions between 2013 and 2016, Drewry is forecasting that in 2017, average freight rates (a blend of spot and contract rates on all routes globally), will rise 12 percent. One East-West routes, it projects the increase will total 14 percent.
However, Drewry did say shippers should be prepared for worst case scenarios where contract rates could increase 20 percent to 40 percent in 2017.
Still, the improvement in rates will take a long time to accomplish. Both 2017 and 2018 “will be challenging on the supply front,” despite the large number of ships that were scrapped in 2016, Drewry said.
High scrapping rates are expected to continue, but Neil Dekker, the head of container research at Drewry, said it “will not be the savior of the industry.”
Rates are rising because of improved demand, rising fuel prices, and better commercial discipline by carriers in the wake of a wave of mergers and acquisitions among carriers during the past year and a half, which has improved the bargaining power of carriers.
Heaney said that following the Hanjin bankruptcy, some shippers want to deal with more financially secure carriers rather than securing the very lowest rates.
The current environment is the opposite of the situation a year ago “when there was no freight rate inflation anywhere to be seen,” Heaney said.
In the fourth quarter of 2016, spot freight rates from Asia to Europe soared 67 percent year-over-year.
Over the same period, eastbound transpacific rates rose 35 percent, while rates from South China to Australia increased 45 percent.
From South China to Brazil, market rates were 300 percent higher in the fourth quarter of 2016 than they were in the same 2015 period, though Heaney noted this had little to do with demand, which he said remains “awful,” and is the result of carriers withdrawing services.
Those rate increases, as impressive af they are, tell you how bad things were in the first place, Heaney said.
There are some factors that could temper the rise in rates, including the ongoing delivery of large new ships, and the cascading of bigger ships into many trades. Alphaliner said it anticipates the global cellular fleet will grow by 3.4 percent, or 694,973 TEUs, in 2017 to 20.97 million TEUs, even after ships are scrapped or deliveries are delayed.
And with the largest container carriers reorganizing and consolidating themselves from four alliances into three, carriers may be unwilling to tamper with their schedules as they seek to win new business, Heaney said. This could eliminate a tool – skipped sailings on some routes on some weeks – that carriers used in 2016 as a way of controlling capacity and stabilizing rates.
In 2016, spot rates from Asia to the U.S. West Coast and from Asia to North Europe significantly fluctuated.
“To use a footballing cliché, it was a game of two halves, with the first half belonging very much to shippers as rates plummeted in the first quarter on the back of weak volumes, oversupply and reduced bunker contributions,” said Heaney. “Then, as we moved into the second quarter, the tide started to turn as demand growth returned to positive territory,” and carriers eliminated sailings.
That helped to raise utilization on ships, and gave general rate increases the ability to stick, explained Heaney.
At the same time, he noted how fuel prices began to rise, which carriers passed on to customers, and the specter of carrier failures, culminating in the Hanjin bankruptcy, resulted in improved market discipline and pricing by carriers.
Since the failure of Hanjin, rates took another upward jolt, and “you can say it’s very much a carriers’ ballpark at the end of 2016, and certainly what we’ve seen at the beginning of 2017 suggests that momentum has continued into this year,” Heaney said.
Dekker said that demand for container shipping is expected to increase slightly to just over 2 percent this year, up from about 1.3 percent in 2016 and 2015.
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About 250,000 TEUs of capacity in the container shipping industry were ordered last year
Dekker noted that demand for container shipping service is no longer growing at a pace that is faster than global economic growth. It used to be that container shipping growth, as measured in TEUs, ran 2.5 to 3 times faster than economic growth as measured by global GDP. In the past couple of years, it has grown at a slower rate than the global economy.
One positive for the liner industry in 2016 is that because 600,000 TEUs of capacity was eliminated from scrapping, combined with some containership deliveries being delayed, there was essentially a balance between demand and containership supply growth in 2016, with the world fleet growing 1.8 percent.
Very few ships were ordered last year – about 250,000 TEUs – and the only significant order came near the end of the year when the Islamic Republic of Iran Shipping Line (IRISL) ordered four 14,500-TEU containerships. Other orders involved ships with less than 4,000 TEUs of capacity.
“It’s interesting – given there was parity between supply and demand – that we actually had such a tumultuous year in 2016,” Dekker said.
But because many of the ships ordered in 2015 will be delivered in 2017 and 2018, he said the industry does face a continuing threat of oversupply in the next two years.
For example, Alphaliner expects the world fleet – after scrapping and delivery delays – will grow 4.7 percent in 2018, an even more rapid clip than the 3.4 percent growth it is forecasting in 2017, and the 2016 growth the fleet saw.
Many of these will be big ships. Alphaliner is forecasting the addition of 25 ships with capacity of 18,000 TEUs or more in 2017, and 28 in 2018; and the addition of 23 in the 13,000-17,999 TEU range in 2017 and 15 in 2018.
Dekker said demand for container shipping last year was impacted by a fall-off in shipments to Russia in the aftermath of its invasion of Crimea; weak growth in Latin America with Brazil in recession and Argentina engaging in protectionist policies; and big economies in Africa, such as Nigeria and Angola, hurt by low oil prices, weaker consumer spending and infrastructure spending.
Demand was stronger in North America, said Dekker, with eastbound transpacific volumes increasing 3 percent. Drewry is forecasting similar growth this year, and said it expects volumes growth from Asia to Europe will be similar to 2016, around 1 percent to 1.5 percent.
South Asia, especially Bangladesh where garment manufacturing is increasing, was a “shining star” with volumes up nearly 6 percent, he said.