Maritime Market Updates

Asia-Europe container lines paying their customers to ship cargo

Container lines are in effect paying their customers to ship cargo from Asia to Northern Europe as spot rates continued their relentless decline to a level so low that carriers cannot even cover their fuel costs. The latest Shanghai Containerised Freight Index (SCFI) shows that rates from China to Northern Europe lost another $ 41 or 14.4% to reach a new all-time low of just $ 243 per TEU. This figure includes surcharges such as Bunker Adjustment Factors (BAF). 

Calculations by analysts SeaIntel show that the average BAF this month on that route is almost $ 300 per TEU. After stripping out that amount, spot rates are minus USD 56. As part of this new ‘Between the Lines’ column for Containerisation International, published in Lloyd’s List, SeaIntel Chief Executive Alan Murphy noted that while the SCFI rates for this trade were at an all-time low, there had been worse times in the past when duel prices were higher. 

Since then, the situation has deteriorated, although this is not the first time Asia-Europe rates have dropped below zero in real terms. Murphy notes that the lowest ever was in December 2011 when BAF-adjusted spot rates collapsed to minus $ 280 per TEU. The first time zero rates or worse were seen was back in 2009. Spot rates cover only a percentage of cargo moved, with carriers and their customers also negotiating three, six and 12 month contracts that will have different price structures. However, spot prices are likely to be used as a benchmark for other rates. 

Freight Investor Services Broker Richard Ward added that this latest drop represents what is a dire situation for carriers that are less financially sustainable, whilst also noting how rates have now been under the psychological $ 1,000 per TEU mark for 16 weeks, the longest time this has occurred since the so called “rate war” at the back end of 2011. Much of this reduction can still be attributed to the fall in bunker prices, which are 40% lower than the corresponding period a year earlier. 

However, over the same time period, freight rates on the key Asia-North Europe trade have fallen by 80%, suggesting carriers have given back more than the savings acquired from the fall in costs. Just as worrying for carriers is that the fall in bunkers has not been maintained into 2015, but rather have actually increased. The price of Singapore 380 CST for example, has increased since the start of the year by roughly 30% to $ 355 per ton.

 

Rate war ignores supply-demand balance

With Asia-North Europe freight rates at an all-time low, analysts have been quick to outline what promises to be an uncertain few months for carriers operating in the vital East-West trade, observing that some of the ‘normal’ market dynamics are currently not operating. Shipping lines will be pinning their hopes on their next round of general rate increases announced for 1 July. However, Drewry’s Director of Container Research, Neil Dekker, told Containerisation International that there were no immediate signs to suggest these proposed price hikes will not follow the same fate as June’s failures. 

Dekker noted how much of the recent rate declines has been largely attributed to the weakness of demand and the steady delivery of new buildings and it may come as a surprise therefore that during the period load factors haven’t fallen drastically, with utilisation levels on the lead-haul trade hovering round the 85% mark since the turn of the year. He said with ships relatively full, there should not have been such dramatic rate erosion. 

The ‘normal’ market dynamics are out of sync and there is no doubt that all lines are simply pushing the rates down every week since they are all so scared of losing any base cargo from volume shippers, he said. While the collapse of the market to Russia has not helped the dynamics and aggressive forwarders have also helped to drive the market downwards, Dekker explained. “Make no mistake, this is another rate war.”

Firstly carriers will initiate further capacity reductions to offset the influx of larger vessels being rolled out on the Asia-Europe trade in the form of outright service cancellation, service downgrading or an extensive blank sailings programme. If carriers choose to close entire strings, however, the vessels that operated these services will have to be deployed elsewhere and this extra capacity could prove even more problematic on other trades, making the decision quite complicated for the carriers, said SeaIntel. 

The second scenario, according to SeaIntel, is that carriers choose not to make such drastic capacity reductions. This would mean that rates would come under even more pressure than they already are, with the potential of sending many carriers into the red for the majority of 2015. Yet there is a third option, mirroring the drastic action taken by carriers between 2008 and 2009 during the global financial crisis, when a significant amount of capacity was laid up. The challenge to this option is that the carriers laying up vessels would bear the entire financial burden of doing so, while those that do not would also reap the benefit, said SeaIntel.

 

Ultra large container vessels pose huge risk

The weak demand story is compounded by the large number of containerships that are due to be deployed in the Asia-Europe routes, said Drewry. Ordering ships that take years to build is always something of a gamble but, as things stand, the roulette wheel has landed on red when all the carriers had put their chips on black. From May until the end of 2015 some 630,000 TEU worth of capacity from new ships of 10,000 TEU and above is scheduled for delivery, with similar levels also expected in 2016 and 2017 and the order book for 2018 and 2019 already filling up. 

Drewry assumes that all of the 14,000 + TEU vessels, cumulative capacity of 503,000 TEU for the remainder of 2015 will enter the Asia-Europe trade, which poses a huge risk to carriers in a slowing market, said Drewry. Moreover, the 10,000 TEU new builds will make it harder to cascade smaller ships currently deployed in Asia-Europe into other trades. Drewry concluded that while the rush to order the biggest containerships might pay off in the long run, at present that gamble has backfired and carriers are faced with overcapacity in Asia-Europe, making it very difficult to see how rates will become sustainably profitable.

 

Changing ports by shippers, a lesson for transhipment ports

After the eight months of West Coast port congestion that crimped USA shippers’ supply chains, 43% of surveyed shippers who have negotiated annual trans-Pacific contracts said they will shift shipments to East Coast ports. Despite the higher rates for East Coast routing, about a third of shippers’ surveyed said trans-Pacific contract rates are relatively unchanged from the last round. One third of shippers said they left the bargaining table with contracts calling for rates increases of more than 3%, according to a recent survey of 112 shippers. 

Shippers appear to have pulled back on how much cargo they plan to reroute away from the West Coast. In late February they said they would reroute more cargo away from West Coast ports this year and next. Of those shipper Executives who said in February they would push more cargo to other ports, the majority, 23% said they planned to shift between 10% and 30% of their freight away from the West Coast ports. While the scale of shippers’ shift may have lessened, the same cannot be said for their frustration and anger over West Coast delays during the prolonged contract negotiations between the International Longshore and Warehouse Union and the Pacific Maritime Association. 

The two sides formalised a five year agreement on 22 May. The scale of diversions is striking. Between January and April this year, East Coast ports grew their share of the Import market to 44%, up roughly 5 percentage points since the end of last year, according to PIERS, a sister product of JOC.com within HIS Maritime & Trade. Meanwhile, West Coast ports’ share of US container imports shrank from 54% to 49% in the first quarter.

 

Forwarders fail online sales test

Most freight forwarders are missing sales opportunities by failing to respond in a timely and user friendly way to customers’ online quotation requests, according to a new study by freight automation specialist Freightos. Freightos said shippers and procurement officers were increasingly likely to buy both goods and services online, with online B2B sales predicted to reach almost $ 7 trillion dollars by 2020, around 27% of global manufacturing trade. 

Its study examining how well freight forwarders were positioned to respond to these emerging needs and patterns of shippers looked at the current trends in on-line logistics sales to new customers visiting the websites of the top 20 global freight forwarders, using ‘mystery shopper’ techniques. Identical quote requests from an LCL shipment from China to Chicago were submitted via the websites of the top twenty global freight forwarders. To give the requests credibility, Freightos said the quote requests came from a well-established company with the shipping requirements of a rapidly growing mid-size US based wholesale company. When dedicated quote request pages were lacking contact forms on freight forwarders’ websites were used, although when even those were lacking, no quote requests were submitted. 

The Freightos State of Online Logistics Sales assessment measured three areas: inbound sales process, forwarder responsiveness and the quote. In terms of the quote itself, only 45% of forwarders ultimately provided a quote. The average quote time was 90 hours. The most prompt response took 30 hours, while the slowest quote time was a full 840 hours. Only five companies followed up after providing the quote in order to attempt to secure the business. In terms of forwarders’ responsiveness, of the 16 forwarders that quotes were requested from 75% of the forwarders did not automatically confirm receiving the request. Three of the 16 forwarders never ended up responding to the initial quote, instantly losing out on the sale. 

[The writer, a Maritime Economist, is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).]