Weak demand forces box carriers to lower rates

The normal general rate increases one would expect at the front end of the month had been replaced with rate decreases.

News ID: 80436

Date: 28 September 2019 - 09:40

Against the grain of expectation, the traditional pre-Chinese Golden Week rush proved to be a no show

CONTAINER shipping lines have moved to slash spot rates to compensate for sluggish volumes on the major east-west trades.

In the lead up to China’s Golden Week, carriers were forced to drop prices to ensure ships sailed as full as possible, with the pre-empted rush ahead of the holiday period failing to materialise.

With factories across China closing in early October, the freight market often looks for a welcome boost before the winter slack season in the hope that shippers will try to bring forward cargo consignments to ensure inventories are maintained.

However, as one major European carrier told Lloyd’s List, the “pre-Chinese Golden Week rush proved to be a no show”.

As a result, spot rates, before factories brought down the shutters in the final week of September, slumped to their lowest level since May on the principal trades out of Asia.

Analysts Platts commented that the normal general rate increases one would expect at the front end of the month had been replaced with rate decreases, as carriers began “to compete for a limited number of cargoes leaving North Asia”.

The Shanghai Containerised Freight Index, which uses Shanghai as a base origin port, made for grim reading. Spot rates on the Asia-northern Europe trade stood at just $639 per teu, and $797 per 20 ft box on Asia-Mediterranean service off the back of further week-on-week declines.

And the pattern was repeated on the transpacific routes, where rates per 40 ft unit fell to $1,338 and $2,351 on the respective eastbound Asia-US west coast and Asia-US east coast trades.

However, spot rates throughout the peak season have flattered on either east-west route. On the transpacific trade, the major factor has been demand, which has been affected by the US-Sino trade war.

Frontloading late last year and in early 2019 by US shippers to avoid impending tariffs was always going to result in a shortfall in cargo given that inventories were well stocked.

The latest count from Container Trades Statistics through to the end of July showed box traffic on the transpacific route was down 0.4% compared with last year. Volumes in July were up, however, only by a measly 0.2%, according to CTS.

Anecdotal market reports suggest transpacific traffic was once again around par in August and September with last year.

Indeed, Orient Overseas Container Line co-chief executive Wang Haimin said in late August that a peak season on the transpacific was unlikely.

Such developments prompted six major US west coast ports to issue a letter in late September detailing the adverse impact of the trade war on their exporting clientele.

“The impacts of the back-and-forth tariffs between the United States and China have hit our exporters particularly hard,” said the letter signed by port directors in Los Angeles, Long Beach, Oakland, Tacoma, Seattle, and Portland.

If not for a buoyant US economy and weighty consumer purse, the situation could have been a whole lot worse and rates even lower.

On the Asia-Europe trade, volumes had been healthy through to the end of July, with teu numbers up nearly 5% in the first seven months of 2019 against last year.

All pointed to a fruitful peak season, but, like the transpacific, there appeared to be a lack of volume impetus in July and August amid continued Brexit uncertainty and weaknesses in key European markets both north and south. This was reflected by unprecedented culls to capacity during August, in addition to the gradual decline of the spot market through the summer months.

With market sentiment low on either trade, it stands to reason as to why carriers have moved to introduce numerous blank sailings through October, in response to expected further weakening of demand.

The list of blanked sailings on the Asia-Europe trade includes the temporary suspension of 2M’s AE-2/Swan offering. The service, one of six loops offered by Maersk and 2M under their alliance partnership, operates on the Asia-northern Europe route and represents weekly capacity of around 18,000 teu, according to Alphaliner. The service will resume in mid-November, demand dependent.

However, this is just the tip of the iceberg, with all three major alliances announcing a comprehensive blank sailing programmes on not only the Asia-Europe and transpacific lanes.

SeaIntelligence noted how in October alone The Alliance will blank six Asia-Europe sailings and nine transpacific sailings, while the Ocean Alliance will withdraw 11 Asia-Europe and 10 transpacific sailings.

In addition to the three AE-2/Swan sailings pulled in October, 2M will blank a further trio on Asia-Europe and five on the transpacific. Depending on how the opening weeks of October pan out, further blank sailings could follow.

So, what of the fate of rates in the final quarter. The weakening of the spot market in late September certainly does not bode well, as carriers fight for the limited cargo on offer.

Platts commented at the time that it had been a tough few weeks, but in the post-Golden Week period “things are likely to get worse”.

Meanwhile, Alphaliner noted how curbing capacity will do little to escape the rate rot.

“While void sailings can be useful for dealing with seasonal short term drops in cargo demand, it has proven to be ineffective as a sustainable strategy to cope with a structural decline in cargo volume growth,” it said.

Keeping ships out of the market for too long becomes a costly affair, Alphaliner explained.

Moreover, with scrapping low and more slot heavy laden ships due on the water before the year is out, the smart money will be on further rate erosion in the closing months and another difficult quarter for the major carriers.