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2010 Mid-year rate outlook: Paying a Premium

While the extent of the recovery remains uncertain, shippers will continue to be hit with rate increases across all modes.
By John Paul Quinn, Contributing Editor
July 01, 2010

In the earlier stages of the downward economic trend of the past two years, analysts were initially reluctant to use the dreaded “r-word.” But now it seems as if
they’re equally wary about using another “r-word,” but this time it’s “recovery.”

“We seem to be enjoying a burst of growth, but the fundamentals aren’t there,” says david Jacoby, president of supply chain consulting firm Boston strategies international.“the job growth is largely in temp work and there has even been a slowing of this as we approached the middle of the year.”

Jacoby adds that corporate investment is also lagging as companies are conservatively hedging their bets since many don’t see this as a sustainable growth situation—at least not yet. “this is not necessarily a dangerous scenario, but it’s a disappointing one,” he says.

Forecasts of GDP growth are hesitant and cautionary as well, according to paul Bingham, managing director of trade and transportation at iHs global insight. according to Bingham, real growth is forecast to be up 3.4 percent this year in contrast to the negative 2.4 percent of 2009, but the pace is expected to slow back to 2.8 percent in 2011.

And there’s another critical factor missing this time around, says Bingham: “in the past, there was a good deal of debt-financed consumption on the part of households and small business that enabled economic expansion to proceed faster, but that won’t be repeated because people can’t get that kind of credit anymore.”

In addition, there is the perennial volatility of fuel pricing to consider, exacerbated by the undetermined long-term impact of the gulf oil spill that could cause fuel prices to rise more precipitously than usual.

And as shippers move through these perilous next few months they’ll continue to be hit with rate increases while the extent of the projected recovery of their businesses remains uncertain. to help get a better handle on just how high your rates will be heading over the next six months, here’s a breakdown of where they stand at midyear.

On the Water, in the Air

Drewry shipping in London reported some fairly stark figures in mid-June, noting that the rate of $2,607 per 40-foot equivalent container unit for shipments from Hong Kong to Los angeles was 183 percent higher than the rate of $929 posted for the second week in June a year ago.

Factors contributing to this situation include the fact that space on vessels remains tight, there’s a shortage of containers, and peak season surcharges are already being implemented by a number of carriers.

“Rates are going up as ocean carriers are trying to make up for the money they lost in 2009,” says Jacoby. “While a lot of supply-demand disciplinary adjustments have been made in ocean transport, shippers should expect rates to return to pre-crash 2008 levels. But the wild card, as in all modes, will be the threat of increasingly escalating fuel pricing.”

The wild card in all modes will be the threat of increasingly escalating fuel pricing.”
— David Jacoby, Boston Strategies International

Global insight’s Bingham believes that if the economic recovery remains sluggish, then ocean capacity will exceed demand to a certain extent, and shippers may be able to rate-bargain with carriers. if this occurs, shippers who have made it through the first half shouldn’t have as difficult a time during the second.

“Air cargo rates will also be on the rise,” states chuck clowdis, iHs global’s managing director for north america. “as shippers see economic recovery they will start flying things again like high-end designer goods from asia which they’ve been content to ship by water during the slowdown. But so far consumer spending spurts seem to be on an as-needed basis in a sporadic pattern.”

Drewry shipping has reported that first quarter 2010 traffic for asia-pacific air carriers surged 33.8 percent yearover-year, and that in some cases air freight rates out of asia to the u.s. West coast jumped 18 percent from March to april of this year.

About the Author

John Paul Quinn
Contributing Editor

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