Unstable Rates, Unstable 2017

container-ship-from-joc

Source: http://joc.com/

 

 

Thanks to an early Lunar New Year this year, there has been a healthy surge in volume that has driven up spot rates to 20-month highs – well above the last five year’s average, says Philip Damas, head of Drewry Shipping Consultants’ logistics practice, “Since last September, we have consistently and rightly warned our exporter and importer customers to expect rate increases in both spot and contract markets.” He continues, “With 2017 contract rates at risk of double-digit increases, now is the time to use the latest e-sourcing tools and strategies to help mitigate cost increases and to avoid a repeat of carrier service failures.”

 

Asia-Europe saw spot freight rates reaching their peak at the end of 2016 since July, Shanghai to Los Angeles also saw a healthy rise of over $500 as well. The World Container Index (WCI) saw a 10+% gain after the January 1st general rate increase (GRI), with expectations of some containers to hit over $2k. Drewry predicts that the hot container demand due to the early Lunar New Year will support further increases next week. The last time the WCI exceeded these types of numbers, of over $1,700/FEU, was March of 2015, before the bloody 2015 & 2016 price war began.  Many shippers though expect that their trans-Pacific contract rates will increase this year. Almost 50% are preparing for increases up to 10%, and more than 20% of shippers surveyed expect rate increases between 10% – 20%. Low freight rates have been plentiful in the market for BCOs since 2010, with last year’s contract season running till April 30th of this year.

 

Nonetheless, major changes in vessel-sharing alliances, plentiful mergers, and acquisitions has followed in the wake of 2016, with many suppliers now concerned about the number of dwindling carriers. “I find the consolidation very worrying for risk mitigation. I know that my carrier relationships are going to change. Risk mitigation is more important than another year of rock-bottom freight rates.” says Steve Hughes, Vice President at Centric Parts for supplier development, government affairs, and logistics. Ronald D. Widdows, executive chairman of American Intermodal Management and former CEO of APL says, “The industry has a capacity challenge because of the large carriers. They grow only if they take share away from other people. [There is] a relentless drive for market share.” He adds, “The people who operate ships have driven down rates to where they are. You would think desperation would sink in. Therefore, if carriers are to reverse the decline in freight rates of recent years, they must change their mindset toward pricing.” And with the fear of driving freight rates so low that more bankruptcies are to follow in Hanjin’s footsteps, this change of mindset from carriers and shippers just may be starting to take place as companies streamline and the number of carrier choices start to dwindle.

 

As pressure continues to mount amid the further widening supply-demand gap due to carriers uninterruptedly deploying increasingly large mega-ships and cargo demand steadily sliding backwards; ultimately, many things will have to change as we move forward in the shipping industry in 2017. But until there is a sweet spot balance in rates and service for both carriers and shippers, the shuffle of restructuring alliances, reduction in carrier options for shippers, and search for stability will need to continue on.

 

 

Additional Information:

  1. 2017 Rate Outlook: Changing Political Landscapes May Be Reflected in Pricing (Logistics Management)
  2. Drewry: Box Rates on East-West Routes Above 5 – Year Average (World Maritime News)
  3. Don’t Expect Year-End Rate High to Last, Says Industry Experts (JOC)
  4. Shippers Prioritize Risk Mitigation in 2017 (JOC)
  5. Ocean Spot Rates Hit 20-Month High (JOC)