Major east-west trades are likely to continue to see significant volatility in freight rates despite a recovery in volumes, according to Drewry Maritime Research, which said carriers should expect rates to drop over the remainder of this year.
Drewry is forecasting that major deepsea east-west freight rates will see a drop of 1.9–2 per cent over the course of this year compared to 2013, while global rates could drop as much as 2.5 per cent. This is largely as a result of north-south freight rates “taking a pummelling” due to the cascading of larger vessel sizes, as ultra large container vessels (ULCVs) are delivered onto the Asia-Europe trade. This is forcing smaller vessels onto north-south trades where they become the new behemoths.
At the same time, however, volumes have continued to strengthen. On the Asia-Europe trade, where the largest ULCVs are being deployed and which has shown the most weakness in recent years following the global financial recession and the subsequent European debt crisis, volumes are on the increase compared to last year. On the headhaul eastbound leg out of Asia, first quarter volumes for 2014 came to 2.4 million teu, a 6 per cent increase on the same period in 2013, while volumes between February and March jumped by an astonishing 40 per cent to reach 824,000 teu. Drewry explained that this was largely due to the timing of Chinese New Year which fell in the first half of February, “meaning there was a lot of catching up to do.”
Nonetheless, Drewry also says that current growth levels are strong and indicate that the two largest east-west trade routes – Asia-Europe and the transpacific – are in reasonably good shape.
“Global port growth is a good indicator of the state of the trade, and there is a good rate of growth in this sector,” says Drewry Supply Chain Advisors’ director Philip Damas. “We are more positive about global prospects than we were six months ago.”
He adds that some of the major ports in these trades are showing growth rates that instil longer-term confidence.
“Antwerp has a current growth rate of 5 per cent. The Los Angeles-Long Beach complex grew by 10 per cent in April, although this could be distorted by early shipments due to port labour worries. And Shanghai’s growth continues to be between 5 and 10 per cent, although we do think there will be a slow-down at some point later.”
On the transpacific trade, there was the added factor of the looming threat of industrial action by dockers at US West Coast ports, where the stevedores’ union – the International Longshore and Warehouse Union (ILWU) – is in the process of negotiating a new master employment contract with the employers’ organisation, the Pacific Maritime Association (PMA).
At the time of writing the existing master contract has expired, although the two sides have issued a statement saying that the dockers have agreed to keep containers moving through West Coast ports at the same levels of productivity that they regularly achieve. Nonetheless, many US importers that use West Coast gateways remain scarred by their experience in 2002, when master contract negotiations descended into acrimony and led dockers to adopt go-slow working practices. Such was the extent of their action that terminals were ultimately forced to lock them out of work rather than accept the low productivity levels. The lock-out lasted 12 days and threw US container supply chains into chaos. It cost the country’s economy billions and took months to clear the box backlog.
“The current employment contract expired on 1 July, and prompted concerns amongst shippers that there would be port shut downs,” says Mr Damas. “This led many exporters and importers to move their cargo early, and this boosted import levels in April and May.”
A side issue, argues Drewry, is that the principal Canadian west coast ports of Vancouver and Prince Rupert – as well as US East Coast ports served from Asia on transpacific services via the Panama Canal and on the longer route via Suez, which is able to accommodate far larger ships – have also seen box volumes rise steeply over the same period as shippers began to test alternative supply chains.
Nonetheless, the rebound in volumes allowed carriers to increase utilisation rates on the Shanghai and Hong Kong to Los Angeles legs. These passed the magic 90 per cent mark, having been below 80 per cent only a few months before. They could have gone higher, had carriers not reintroduced some sailings that were originally earmarked for blanking.
But the problem is that the trend in rates did not, surprisingly, correspond to the normal forces of supply and demand. Instead, they continued to veer erratically, especially on Asia-Europe, as they have done for the past couple of years. That said, even in the confusion, something of a pattern has begun to establish itself. Over the course of a number of weeks, rates declined steadily. To arrest these drops, carriers announced a series of general rate increases (GRIs) which, until last November, mostly consisted of almost identical GRI price hikes with identical implementation dates. Rates would leap on the date of implementation and then once more begin their steady descent.
November’s announcement from the European Commission (EC) that it was investigating 13 container lines on the suspicion of price signalling changed this pattern. In May 2011 EC investigators held a series of dawn raids on carriers in what was described as a fishing expedition – looking for evidence that carriers had been breaking anti-cartel legislation. Signalling is notoriously difficult to prove, but refers to companies publically announcing price increases in the hope that their competitors follow suit. The fact that the GRI amounts were uniformly in a very narrow band and almost always implemented on the same date certainly raised suspicions, but the EC will have to prove that there was some intent on the part of carriers to influence the behaviour of the market. That will be much harder unless they can unearth some hard evidence, such as emails between different lines.
However, the revelation that the lines were the focus of the EC’s investigation had a dramatic effect on their behaviour. Suddenly the timings of the GRIs varied, as did the amounts, and the sudden hikes that had periodically been experienced by shippers disappeared. The weakness in freight levels remained, however, because carriers were able to win market share simply by letting their competitors increase spot rates and leave their own unchanged.
The best example of how ineffectual the GRI mechanism has been for carriers over the long term is found at German carrier Hapag-Lloyd. Its latest GRI was due to come into effect on 9 July, an increase of US$1,000 per teu. This brought the sum total of GRIs introduced on the route by the carrier since 1 March 2014 to US$3,325 per teu. And yet the Drewry-assessed World Container Index’s Shanghai-Rotterdam leg showed a rate of slightly over US$2,500 per feu at the beginning of March and slightly under US$2,500 by the beginning of June.
On 9 June Hapag-Lloyd was due to implement a further US$750 per teu GRI on the trade. However, its peers, including its G6 Alliance partners, chose to defer or delay their increase. Hapag Lloyd’s GRI stood little chance of success, and it was ultimately withdrawn as a result.
Martin Dixon, head of research products at Drewry, argues that the real determining factor of freight rates is therefore not supply and demand but cost per teu slot. The increasingly wide-scale deployment of ULCVs of 13,000 teu-plus capacity has changed the very economics of some deepsea trades.
He told delegates at the TOC Container Supply Chain event in London in June that in the past two years the correlation between freight rates and load factors on Asia-Europe has been replaced by the link between rates and unit costs. As costs are driven down, rates will follow.
Mr Dixon said that Drewry expects freight rates to continue to fall this year and that the ocean carrier winners would be the cost leaders of the industry.
Deepsea liner shipping has always been an industry in which market share is the number one goal, and larger ships equal cheaper costs per box. Similarly, attempts to increase rates on the transpacific – on which carriers are allowed to jointly implement GRIs if they are part of the Transpacific Stabilization Agreement – have also met with little success because of carriers’ quest for market share.
Although one would expect more discipline in a trade which still has a conference, the attempts to raise rates came when carriers and shippers were involved in rate negotiations for their annual contracts; a far greater proportion of the transpacific trade is carried under rates set a year in advance than on Asia-Europe, which has a larger spot market. Nonetheless, the levels at which annual rates are set closely follow the spot rate at the time, and a mid-March GRI of US$300 per feu has hardly been implemented as carriers preferred to keep rates low to hold onto business before contracts were signed on 1 May.
“The current balance between supply and demand suggests that eastbound freight rates to Los Angeles and Long Beach will remain stable in the third quarter of 2014, assuming that US West Coast port strike action does not get in the way. Although cargo growth will drop due to some exports being shipped prematurely to the US out of fear of US West Coast port strike action, this year’s peak season should counteract it,” says Drewry. CST
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