Short-term pricing ‘now better for shippers’ on China-Europe trade

7/12/2017

European importers sourcing from China could realise major savings by shifting from long-term ocean freight agreements to short-term shipping contracts in the months ahead, according to Patrik Berglund, CEO of container shipping market intelligence platform Xeneta, who reported “a pattern of companies going on shorter contract durations”.

Over the last 18 months on the China Main Ports-North Europe Main Ports trade, he said there had only been a brief window when it was beneficial to be in the short‑term market rather than using long-term contracts – defined by Xeneta as contracts of three months’ duration or more. According to Berglund, this was because the gradual, although volatile, increase in rates over much of the last 18 months on China-North Europe trades had tended to favour long-term freight products.

However, with the market now trending downwards, in his opinion, he said freight buyers should consider changing their strategies. “Now the market is moving down, if you have the abilities to switch and sit in the short‑term market on that corridor, that would definitely be the most competitive prices you could reach, as for now,” he told Lloyd’s Loading List.

And Berglund claimed this was the correct strategy in the current market, even though freight rates saw major gains last week – for example, Drewry’s World Container Index, a composite of container freight rates on eight major routes to and from the US, Europe and Asia, was up 12.2% last week to US$1,550 per 40ft container. Spot rates for a 40ft box on the benchmark Shanghai-Rotterdam route “shot up” last week by 17% or $284 to $1,936 – “as a result of peak season demand and the 1 July GRIs” (general rate increases) – although that is 4% below the same period last year. Drewry predicts that those Asia-Europe prices will hold firm this week.

But Berglund said this early July spike “doesn’t change the basic dynamics in any way”, although the market needed to be monitored carefully – not least to see if July GRIs by lines stick in the lead up to the peak shipping season.

“If they [shippers] have the opportunity, switching to short term would enable [them] to exploit the opportunities when the market is falling,” he said. “We see that historically as well.

“But very often, larger volume shippers/BCOs won’t have that flexibility in their structure – neither operational nor from a sourcing point of view. Some do and take advantage of the different market conditions.”

More generally, he also said Xeneta had seen “a pattern of more and more companies going on shorter contract durations – not necessarily month‑by‑month, but annual contracts are maybe shifting to quarterly or six‑month, or an annual contract with quarterly reviews”.

However, Berglund’s predictions about pricing trends in the second half of 2017 conflict with those of container shipping analyst Drewry. As reported today in Lloyd’s Loading List, Drewry believes ocean freight rates from Asia to North Europe should continue to rise in the second half of 2017 if carriers manage capacity carefully.