Ocean Cargo: Capacity Crunch Continues
January 16, 2014 - SCMR Editorial
As always, the freight rate outlook for container shipping will vary by route and by direction and will depend on the length of contracts, say analysts for the London-based consultancy, Drewry Supply Chain Advisors.
“Overall, we predict a moderate increase in freight rates in 2013 of 3-6% in average east-west freight rates in 2013,” says Drewry’s director, Philip Damas. “Contract tenders currently being finalized for calendar 2013 also indicate this type of rate changes.”
The fact that rates may rise in a weak market is partly because of the lag time of annual contract rates, he explains. In early 2013, annual contract rates which commenced in early 2012 (at a time of a price war between ocean carriers) will expire. These very low contract rates will then be replaced by slightly higher ones.
“Shippers who buy shipping capacity on a spot basis or under short-term contracts have been paying significant rate increases since the summer of 2012,” says Damas.
“In effect, these shippers have already seen price increases from which annual contract shippers have until now been insulated.”
The fuel surcharge component of container freight rates will remain high in 2013 in line with the underlying marine fuel price trends. However, the container shipping market remains unstable and unstable, Drewry analysts say.
“We note that carriers have been losing money in 2011 and 2012 and are close to the point where they will need to reduce capacity to protect their cash flow,” says Damas. “If the situation worsens, we could see a repeat of 2010, when capacity was slashed, freight rates were ratcheted up and contracts were renegotiated.”
So how do shippers protect themselves? Drewry generally advises them to develop close relationships with core, preferred carriers, and to run detailed professional tenders, instead of trying to capitalize on attractive, short term price reductions from unfamiliar or “opportunistic” carriers.
“We say this because of the continuing disruption in the market, which could result in the interruption of service or in sudden freight rate increases or in unilateral contract terminations,” says Damas. “Just look at the speed at which some small transpacific carriers pulled out of the market, with little or no notice, when rates fell.”
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