Ocean cargo analysts tell shippers to focus on long-term contracting

Freight rates on east-west trades have been in the ascendency of late.

By ·

Shippers should not lose sleep over the recent, short-lived jump in spot rates, but ought instead focus on ways to mitigate the risk of another sudden capacity crunch later in the year, urges Drewry Maritime Research.??

Freight rates on east-west trades have been in the ascendency of late. Drewry’s Hong Kong - Los Angeles container rate benchmark, as published in the Container Freight Rate Insight, leapt 28 percent in the first week of the year.  The benchmark rose $396 to $1,832 per forty-foot equivalent unit (FEU) and successfully sustained this level into the second week. Transpacific Stabilisation Agreement (TSA) carriers have been successful in forcing through their intended $400 per 40ft container rate increases.??Shipping lines have had similar success on the Asia-Europe trade.

The World Container Index (WCI) benchmark rate between Shanghai and Rotterdam soared 41 percent in the first two weeks of January to $1,335 per FEU. The increase of $391 per FEU was in line with carriers’ intended peak season surcharge (PSS) of $400 per FEU. The WCI is a joint venture between Drewry and exchange specialist Cleartrade.??

Buoyant shipping volumes in advance of Lunar New Year factory closures in Asia have filled ships to bursting, causing most carriers to roll containers. Some shipping lines have reported load factors in excess of 100 percent, so emboldening aggressive rate hikes.??

“However, the big question on everyone’s minds is how sustained the rates revival will prove and what this means for 2012 transpacific contract rates?” asked Martin Dixon, research manager of Drewry’s Container Freight Rate Insight. “Once the pre-Chinese New Year rush recedes later this month spot rates will retreat back to December levels, unless carriers take action to remove surplus capacity from the trade. Shippers would be well advised to wait a few weeks before commencing contract negotiations.”?

Most transpacific freight contracts run from May to April. In 2011 shippers and carriers settled at contract rates at or below the previous year’s level. However, this year shippers can expect to secure much lower shipping costs given the weak state of the container shipping market. ??For instance, Drewry’s Hong Kong - Los Angeles container rate benchmark had declined 27 percent between the first week of May and the end of 2011. The spot market is often a strong lead indicator of prevailing contract rates.??

“However, shippers should beware,” cautioned Dixon. “Locking carriers into low freight rates today may hinder surety of supply in the future.” ??

Drewry expects freight rates to rise sharply in the second half of the year as cash-burn forces carriers to slash capacity.??“A repeat of 2010 seems inevitable, when freight rates rose and space availability was highly restricted,” added Dixon. “Drewry strongly recommends shippers look at the benefits of index-linked contracts to mitigate these dangers.”??Prior to the recent bounce in pricing, east-west freight rates had been in free fall. Drewry’s East-West Freight Rate Index, a weighted average across key Asia-Europe, transpacific and transatlantic trade routes, had declined 38 percent in the 12 months to November 2011.??

However, other indices published in Drewry’s Container Freight Rate Insight suggest that some regions of the world have proved more stable than others. For instance, Drewry’s Intra-Asia Freight Rate Index lost just 6 percent through 2011 and gained 4 percent in the four months to November 2011.??“Few trades can claim this level of sustained stability,” observed Dixon. “Despite cascading tonnage from other overburdened trades, rates on Asian regional trades have remained remarkably stable thanks to burgeoning traffic growth.”?

According to Peter Sand, chief shipping analyst for The Baltic and International Maritime Council in Copenhagen (BIMCO), inflow of new tonnage in 2012 has created downward pressure on freight rates, asset values, and earnings, basically affecting all participants in the shipping industry.
“The supply/demand ratio must be balanced somehow,” says Sand. “Handling this with care is a condition for bringing back profitability to ship owners, at least in the short term.”


About the Author

Patrick Burnson, Executive Editor
Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review magazines and web sites. Patrick is a widely-published writer and editor who has spent most of his career covering international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. You can reach him directly at [email protected]

Subscribe to Logistics Management Magazine!

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your entire logistics operation.
Start your FREE subscription today!

Article Topics

Ocean Cargo · Ocean Freight · Trade · All Topics
Latest Whitepaper
Private Fleet vs. Dedicated: Which one is right for you?
Having the right fleet for your business can give you an advantage over the competition and lower transportation costs.
Download Today!
From the April 2017 Issue
While adoption rates have remained relatively flat, yard management systems (YMS) are helping logistics operations turn that important space between the loading dock and the gate into a vital link in the supply chain.
Information Management: Wearables come in for a refit
2017 Air Cargo Roundtable: Positive Outlook Driven by New Demand
View More From this Issue
Subscribe to Our Email Newsletter
Sign up today to receive our FREE, weekly email newsletter!
Latest Webcast
Maximize Your LTL Driver Adherence with Real-time Feedback
This webinar shows how companies are using real-time performance data to optimize the scheduling of their city fleets, as well as the routing of their standard, accelerated and time-critical shipments.
Register Today!
EDITORS' PICKS
2017 Salary Survey: Fresh Voices Express Optimism
Our “33rd Annual Salary Survey” reflects more diversity entering the logistics management...
LM Exclusive: Major Modes Join E-commerce Mix
While last mile carriers receive much of the attention, the traditional modal heavyweights are in...

ASEAN Logistics: Building Collectively
While most of the world withdraws inward, Southeast Asia is practicing effective cooperation between...
2017 Rate Outlook: Will the pieces fall into place?
Trade and transport analysts see a turnaround in last year’s negative market outlook, but as...