Container shipping rates forecast to rise, but not enough to stop liner losses

Bruce Barnard, Special Correspondent | Jul 05, 2016 11:29AM EDT

“There are distinct parallels between what is happening now and the depths of the 2008 global financial crisis.”

Ocean container freight rates are set to rise “modestly” over the coming 18 months from recent all-time lows, but not enough to rescue the industry from “substantial” losses in 2016, according to Drewry Shipping Consultants.

“For 2017, Drewry anticipates a slightly brighter picture with global freight rates forecast to improve by about 8 percent,” said Neil Dekker, Drewry’s director of container research.

Carriers likely will take some action to address overcapacity as “cash flow attrition” become more urgent and beneficial cargo owner rates rise from this year’s lows. Container lines have already cut capacity, with three trans-Pacific weekly services shelved; the number of Asia-Europe services down to 17 from 21; and weekly services to the east coast of South America from Asia down to three from eight a year ago, according to JOC.com research and Alphaliner.

“But once again, this can’t be seen as a genuine recovery since these so-called improvements must be set in context against the unnecessarily big rate declines since in both 2015 and 2016,” Dekker said.

“Indeed, after some good repair work in the Asia-to-East Coast South America trade, which improved spot rates from a lowly $100 to $200 per 40-foot-equivalent unit to over $2,500 per box, the industry can only wait and see what happens elsewhere.”

Liner shipping has had a “torrid” time so far this year with spot freight rate volatility reaching unprecedented levels, while unit industry income has fallen to record lows, according to the latest quarterly Container Forecaster report by the London consultancy.

“There are distinct parallels between what is happening now and the depths of the 2008 global financial crisis.”

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Container lines have collectively signed away $10 billion in revenue in this year’s contract rate negotiations on the two main east-west trades.

With annual trans-Pacific contract rates as low as $800 per FEU to the U.S. West Coast and $1,800 to the East Coast, lines have repeated what they did in May 2009 in a desperate bid to retain market share, Drewry said.

“With first-quarter headhaul load factors at around 90 percent, there was no logical reason for carriers to sign so much revenue away in one fell swoop.”

While spot rates on the core trades have significantly improved after the general rate increases on July 1 “it is still too early to say if carriers have suddenly changed their approach to commercial pricing.” Spot rates on Asia to North Europe surged 94.5 percent week-over-week on July 1 to $1,206 while from Asia to the U.S. West Coast the spot rate jumped 60 percent week-over-week to $1,209, according to the Shanghai Containerized Freight Index, which can be found on JOC.com’s Market Data Hub.

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The lowest contract rates signed in years on the trans-Pacific have combined with the sudden jump in spot rates on the trade to give rise to fears that lines may soon roll some contract cargo for higher-paying loads on the spot market.

While the new alliance structures are bedding-in between now and April 2017, “this work will take some time yet.”

The Ocean Alliance of Evergreen Line, CMA CGM, China Cosco Shipping, and Orient Overseas Container Line is currently the only alliance whose membership in 2017 is certain. The 2M Alliance of Maersk Line and Mediterranean Shipping Co., could include Hyundai Merchant Marine and Zim Integrated Shipping Services at that time, although HMM has also said it could join THE Alliance. THE Alliance's current line-up consists of NYK Line, MOL, “K” Line, Hanjin Shipping and Yang Ming Line. Hapag-Lloyd, which is merging with United Arab Shipping Company, pending regulatory approval, is also a member of THE Alliance.