Capacity cuts tackle rate war, but more is needed, Drewry says
Greg Knowler, Senior Asia Editor | Sep 07, 2015 5:53AM EDT
HONG KONG — The unprecedented decision to cut capacity during the traditional peak season of the year brought to a halt the rate slide that started in March and by June had developed into a full-blown rate war among the carriers, according to Drewry.
By the end of the first half, spot rates had slumped to historic lows of $350 per 40-foot container — a level that did not even cover the fuel cost element let alone any contribution to the slot cost or other operating expenses, the analyst said in its Container Insight Weekly.
Drewry attributed a decline in Russian demand for Asian goods as a major contributory factor to the overall trade result. In the second quarter, traffic bound for Russia registered a drop of 30 percent against the same period a year earlier, with volumes to neighbouring Finland and Estonia — through which some Russian transit cargo move — decreasing by 26 percent and 35 percent respectively.
“The abrupt decline in Russian traffic sent some carriers scurrying into the spot market to find replacement loads. The senseless bloodletting in that market was further fuelled by some lines caving in to demands by certain BCO accounts to reduce their annually contracted rates to the disadvantage of those carriers who resisted such approaches and who in turn had to make up for lost cargo by raiding the open market,” the London-based analyst noted.
The malaise in the Russian market has deprived the trade of any meaningful peak season flow taking place in the third quarter. Admittedly, Drewry said, seasonal cargoes such as toys and Christmas decorations to North Europe as a whole had compensated for the loss of Russian traffic but some forwarders have reported lower volumes of garments and electronic parts moving through the system compared to last year.
Still, Drewry said the business has improved in the third quarter with monthly general rate increases enabling the lines to fix their monthly local forwarder deals at a level that did not conflict with the average BCO rate originally contracted at $1,600.
“The problem remains that after the first few days of each month the impetus is lost and spot rates slide back to around $1,000 as the month wears on,” Drewry said.
Asia-Europe is a trade lane burdened with surplus capacity and the weak demand has encouraged carriers to apply more permanent capacity reduction initiatives. Head haul Asia-Europe volumes in the second quarter fell year-over-year by 5.8 percent, resulting in an overall cargo decline in the first six months of 2015 of 3.5 percent. By the end of June, the 12-month average rolling growth rate had fallen to 1.7 percent.
Drewry said carriers have been making strenuous efforts in the last four months to keep head haul vessel utilisation above the 90 percent mark after it had dipped to as low as 74 percent in March.
The main tool to effect this has been voided sailings and the targeted load factor of 90 percent-plus was achieved in May and June, with that level continuing into July and August. The analyst said capacity provided in the second quarter was in fact marginally lower than in the first quarter, despite the arrival on almost a weekly basis of one new ultra large container vessel into the trade. Slots supplied in July only rose by 1.3 percent compared to the same month a year earlier.
More telling is the fact that the lines have now acknowledged that ad hoc blanked sailings alone would not be the panacea to restore some degree of equilibrium to their business, Drewry noted. More permanent culls were called for.
All the alliances have been cutting sailings, with Ocean Three effectively removing a whole loop from westbound trade. The G6 members have been blanking sailings at a rate of four per month but it remains to be seen whether they or the CKYHE partners opt to withdraw a string completely.
By the end of the first half, spot rates had slumped to historic lows of $350 per 40-foot container — a level that did not even cover the fuel cost element let alone any contribution to the slot cost or other operating expenses, the analyst said in its Container Insight Weekly.
Drewry attributed a decline in Russian demand for Asian goods as a major contributory factor to the overall trade result. In the second quarter, traffic bound for Russia registered a drop of 30 percent against the same period a year earlier, with volumes to neighbouring Finland and Estonia — through which some Russian transit cargo move — decreasing by 26 percent and 35 percent respectively.
“The abrupt decline in Russian traffic sent some carriers scurrying into the spot market to find replacement loads. The senseless bloodletting in that market was further fuelled by some lines caving in to demands by certain BCO accounts to reduce their annually contracted rates to the disadvantage of those carriers who resisted such approaches and who in turn had to make up for lost cargo by raiding the open market,” the London-based analyst noted.
The malaise in the Russian market has deprived the trade of any meaningful peak season flow taking place in the third quarter. Admittedly, Drewry said, seasonal cargoes such as toys and Christmas decorations to North Europe as a whole had compensated for the loss of Russian traffic but some forwarders have reported lower volumes of garments and electronic parts moving through the system compared to last year.
Still, Drewry said the business has improved in the third quarter with monthly general rate increases enabling the lines to fix their monthly local forwarder deals at a level that did not conflict with the average BCO rate originally contracted at $1,600.
“The problem remains that after the first few days of each month the impetus is lost and spot rates slide back to around $1,000 as the month wears on,” Drewry said.
Asia-Europe is a trade lane burdened with surplus capacity and the weak demand has encouraged carriers to apply more permanent capacity reduction initiatives. Head haul Asia-Europe volumes in the second quarter fell year-over-year by 5.8 percent, resulting in an overall cargo decline in the first six months of 2015 of 3.5 percent. By the end of June, the 12-month average rolling growth rate had fallen to 1.7 percent.
Drewry said carriers have been making strenuous efforts in the last four months to keep head haul vessel utilisation above the 90 percent mark after it had dipped to as low as 74 percent in March.
The main tool to effect this has been voided sailings and the targeted load factor of 90 percent-plus was achieved in May and June, with that level continuing into July and August. The analyst said capacity provided in the second quarter was in fact marginally lower than in the first quarter, despite the arrival on almost a weekly basis of one new ultra large container vessel into the trade. Slots supplied in July only rose by 1.3 percent compared to the same month a year earlier.
More telling is the fact that the lines have now acknowledged that ad hoc blanked sailings alone would not be the panacea to restore some degree of equilibrium to their business, Drewry noted. More permanent culls were called for.
All the alliances have been cutting sailings, with Ocean Three effectively removing a whole loop from westbound trade. The G6 members have been blanking sailings at a rate of four per month but it remains to be seen whether they or the CKYHE partners opt to withdraw a string completely.
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