Rate slides putting downward pressure on Asia-Europe contract negotiations

11/28/2017

Sliding ocean freight spot rates on key East-West trades are putting downward pressure on contract price negotiations between lines and shippers, according to analysts

As reported in Lloyd’s Loading List, spot freight rates on the transpacific and Asia-Europe trades slumped further last week to levels some 22%-26% lower than a year earlier.

Drewry’s analysis largely chimes with short-term data from Xeneta, the container shipping market intelligence platform. Xeneta said spot rates this month compared to a year earlier on key routes were substantially lower. 

China Main Port-North America East Coast short-term average rates per FEU on 20 November were down 16% year-on-year, for example, while the ‘market low’ was some 25% lower year-on-year.

On the China Main-North America West Coast trade, the market average per FEU was down 23% and the ‘market low’ was 28% lower on 20 November.

However, Xeneta said on Asia-Europe rates were holding up better, with China Main-North Europe market averages per FEU were 12% lower than a year earlier, and the ‘market low’ was 1% in arrears.

“All three routes have a much more substantial decline if comparing to the beginning of this year,” said Patrik Berglund, CEO of Xeneta.

Explaining the recent slide in rates, Neil Dekker, consultant at ClipperMaritime-London, said that in mid-November volumes normally faltered and load factors typically dropped down to around the 90% level, and this year was no different to previous years.

“The waters have been muddied even more by the Chinese factory shutdowns and the coming months are still unclear,” he added. “However, it is noticeable that lines have had fewer blank sailings moving into the winter period and, unlike in previous years, carriers have not announced a winter suspension programme. 

“At this late stage, it now appears unlikely that they will do so and it seems they are banking on a decent December and pre-Chinese New Year (CNY) spike,” noting that CNY 2018, on 16 February, falls much later than it did last year.

Dekker also added that 2016 was unique because, with Hanjin’s demise in August of that year, three major East-West loops were taken out overnight – the NE6 and MD3 services and the AWE1 pendulum.

“Relatively little of this capacity was put back into the market which gave lines a lever to ramp spot rates up, and they took advantage of that,” he added.

“Hanjin’s cargo was also tied up in September and much of it was only shipped in October or later. This scenario has clearly not been repeated in late 2017 and with a reluctance to take out sailings, headhaul rates on the East-West routes have declined by 20%-30% since early August.

“Spot rates of $1,300 per feu to North Europe and the US West Coast are nowhere near where lines would want them to be at this stage of the year. Unless there is a Christmas demand spike, rates will continue to fall, which is dangerous for the European market as BCOs [Beneficial Cargo Owners] are starting their tender process now.

“For 2018, there are 62 ships of at least 13,000 teu due for delivery and most will go into the East-West trades. This is an even bigger short-term risk for trade lane stability.” 

However, Berglund, CEO of Xeneta, argued that although freight rates on key trades had seen some major losses, lines were still “riding into the year end on a much healthier market compared to a year ago” − both for short- and long-term markets.

“There’s still more time to jack it up some, from the carrier point of view,” he commented. “But regardless of whether this happens, I’d argue that the most important thing would be to avoid it plummeting down much more than what we’ve seen.”

If further major declines in pricing is avoided, contract negotiations for 2018 “will still come into play from a quite healthy carrier market”, argued Berglund. But if spot rates fall significantly, that will affect the market for long-term contracted rates.

On the China-North Europe trade, Berglund said there were already newly negotiated long-term contracts for 2018 contracted at levels below the highest contract rate levels negotiated for 2017, “but this is still more than double the lowest average point we had for (long-term contracted rates for) 2016” − meaning that 2017 contacts could still be “sustainable” for carriers.

He added: “We also have plenty of long-term contracts committed throughout the full year of 2018 at double the low point of 2016. So, all in all, taking both short and long-term markets into consideration, it might not be a too stressful market for the carriers – and that blanking sailings more heavily is more costly – perhaps for now at least.