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

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

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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]

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