Source: Journal of Commerce
April 18th 2016
Spot market rates in the eastbound trans-Pacific edged lower for the second straight week, demonstrating that general rate increases taken by some carriers on April 1 are eroding.
This is an ominous sign for carriers in the U.S. import trade from Asia because it is starting to look like 2016 will be a repeat of the past two years, when carriers every two or three months would announce GRIs, only to watch them rapidly deteriorate in subsequent weeks.
The low spot rates could also take away some of carriers’ pricing power during contract rate negotiations since they signal weak demand and overcapacity.
The spot rate for shipping a 40-foot container from Shanghai to the West Coast was $770, according to the Shanghai Containerized Freight Index, which is published each week on JOC.com’s Market Data Hub. That was down 9 percent from $849 the week before. The spot rate peaked during the week of April 1 at $922 per FEU.
The spot rate to the East Coast this past week dropped 5 percent to $1,648 per FEU from $1,732 the week before. The recent peak for the spot rate to the East Coast was the week of April 1 when it hit $1,787 per FEU.
A second reason why the slide in spot rates is dangerous for carriers is that they are finalizing contract rates with customers for the new contracting year that runs from May 1 through April 30, 2017. Declining spot rates send a clear message that carriers will have little leverage in the coming year, so they usually offer low rates to at least set a floor for service contracts.
Anecdotal evidence from shippers, carriers and industry analysts indicate that contract rates to the West Coast are about $1,400 per FEU for small and mid-sized BCOs, and $1,100-$1,200 for the largest retailers. Contract rates to the East Coast for agreements signed earlier this month were reportedly about $1,900-$2,100 per FEU, with the biggest retailers signing for about $1,800.
Carriers’ problems stem from the significant overcapacity that plagues the major east-west trade lanes. The situation is especially dire in the Asia-Europe trades, where the biggest ships are deployed first. That trade is so saturated, though, that carriers are cascading ships of 14,000 to 18,000 twenty-foot-equivalent units into the Asia-West Coast services, and this is forcing freight rates lower.
Overcapacity is expected to remain a problem for carriers through 2017, even though U.S. import traffic is robust so far this year, and containerized imports are projected to increase at least 5 percent in 2016.