Ocean freight rates from Asia to the U.S. West Coast are following a similar pattern to last year, when early gains were followed by sustained declines after the Chinese New Year, according to Patrik Berglund, CEO of rate benchmarking platform Xeneta.
Even after a profitable 2017 and continued rate increases in the early parts of 2018, the container shipping industry might not be out of the woods just yet.
According to Patrik Berglund, co-founder and chief executive officer of ocean freight rate benchmarking and intelligence platform Xeneta, pricing in the transpacific trade has been steadily falling since the Chinese New Year holiday, a trend that could be indicative of persistent overcapacity in the market.
That excess of capacity, something the industry has struggled with for years, was largely to blame for a race to the bottom on rates that ultimately resulted in the horrific year the container carrier industry suffered in 2016, when several of the world’s largest carriers were either merged, purchased or in the case of South Korea’s Hanjin Shipping, exited the industry entirely due to bankruptcy.
Berglund wrote in a recent blog post that ocean freight rates from Asia to the U.S. West Coast are following a similar pattern to last year, when early gains were followed by sustained declines after the Chinese New Year.
At the start of last year, carriers were able to push through two general rate increases (GRIs) on the eastbound transpacific trade, boosting average rates 29.6 percent—from $1,646 per FEU on Dec. 31, 2016, to $2,134 per FEU on Jan. 1, 2017—and then another 6.3 percent to $2,269 per FEU as of Jan. 15.
Following the Chinese New Year holiday, however, carriers were unable to maintain these GRIs, and rate levels immediately began to slide, falling 36.2 percent from mid-January to $1,447 per FEU, even lower than the end-of-year mark for 2016.
“As we approach the end of Q1 2018, rates so far tell a very similar story the pattern witnessed in 2017,” wrote Berglund.
He noted that carriers were again able to push through a planned $1000 per FEU GRI for Jan. 1, 2018, helping to lift rates 25.3 percent—from $1,249 FEU as of Dec. 31, 2017, to $1,565 per FEU on Jan. 1, 2018.
Thanks to the pre-Chinese New Year rush, carriers were also able to implement a second GRI for Feb. 1, 2018, pushing average rates up to $1,648 per FEU, but since then, rates have steadily fallen, reaching $1,169 per FEU as of March 20.
And according to Berglund, this does not bode well for the rest of the year, at least for the container carriers. Shippers, on the other hand, might be able to use this knowledge to their advantage when negotiating their yearly contract rates.
“Shippers should be somewhat buoyed by carriers inability to sustain rates after GRIs have been implemented,” he wrote. “This was a key trend in 2017 and seems to be repeating itself so far in 2018. For example, a planned GRI was behind every noticeable rate increase of 2017, but in each case these were met with rate discounts within a week or less.
“While historical rate developments are not necessarily reflective of how they may develop in the future, they remain indicative of a market which remains oversupplied and understanding these trends can provide a useful benchmark when negotiating long term contracts,” he added, noting that the average rate for the full 2017 calendar year was reported at $1,600 per FEU.
“With hindsight shippers negotiating long term contacts were, on average able to achieve a discount to this,” said Berglund.
“Of course, carriers have the power to change market fundamentals via service withdrawals, but the discipline required for this to be sustained in the long run seems lacking,” he wrote. “Therefore it’s not unreasonable to assume future GRIs on the trade, will on average, be quickly followed by rate discounting.”
In spite of this continued trend, Xeneta data suggests that shippers are agreeing to higher contract rates during the 2018 negotiating season than they did the previous year.
“In particular, those negotiating long term contracts for commencement around May-18 are achieving an average price of $1,455 FEU, versus $1,386 FEU recorded at the same period a year earlier,” wrote Berglund.
“However, shippers should be questioning, with current FAK rates seemingly developing along the lines of 2017 and already 23.8% lower than this time last year (as of 20th Mar-18), should they be finalizing long term contracts at a similar level to 2017 or perhaps slightly lower?”
Xeneta: Transpacific rate instability indicative of persistent overcapacity
