Drewry Supply Chain Advisors say ocean cargo rates will firm up in 2018

After the strong upwards correction of freight rates witnessed in global ocean container transportation during 2017, the question now is whether the trend will continue for another year or whether rates will stabilize.

According to Philip Damas, director of London-based Drewry Supply Chain Advisors, one temporary factor behind the increases was the bankruptcy of Hanjin Shipping (then the 6th largest global ocean carrier) in September 2016.

There was a strong resulting surge in spot rates due to reduced capacity, a “fear factor” among shippers who accepted higher prices to ensure continuity of service and a change of behavior among ocean carriers, who decided to move away from chasing market share at discounted rates and instead focus on carrying cargoes at compensatory rates.

Other factors supporting the rate increases of 2017 will continue in 2018: a return of higher trade volume growth and a further increases in fuel prices (triggering higher fuel surcharges), among others.

In Drewry’s opinion, some of these price drivers will continue to influence the direction of prices in 2018, whereas other were short term and will have no further effects.

Despite the increase in deliveries of large containerships scheduled for 2018, we do not expect a new price war in ocean transportation, as robust demand growth and higher carrier concentration will also influence the market.

On average, freight rates in the global ocean transportation sector increased by about 10% if you compare the first 3 quarters of 2017 vs the same period a year earlier.

This was a reversal of the prior deflationary trend of ocean rates. On the high-volume lanes from Asia to the U.S. and from Asia to Europe, increases in fixed annual contract rates of more than 30% were common, whereas rate increases on secondary lanes were marginal. 

But a new trend since the fourth quarter of 2017 is that spot freight rates on these high-volume lanes from Asia to the US and from Asia to Europe, which had been high for the 10 months or so after the Hanjin Shipping bankruptcy, have weakened a lot since July 2017.

This leads some to expect that 2018/19 fixed annual contract rates, when they are negotiated in the next few months, will also be lower than in the current year.

Based on Drewry’s experience of managing ocean freight tenders and also using our forecasts and insights into the supply-demand balance and carrier costs, we warn manufacturers and retailers that further increases in spot rates of up to 10% are likely in 2018 (if you do not ship under contract), but medium and large companies shipping under contract on the major lanes should be able to secure new contracts with average increases of about 5%, depending on the lane. It is unlikely that further increases of more than 30% in contract rates will happen in the next year.

There will be exceptions, like the Asia-US East Coast lanes, where we expect that new market entrants will disrupt the market and trigger some rate decreases, and like the Europe-to-Asia and some North-South lanes, where there may be higher rate increases than 5%.

Retailers and manufacturers should watch the ocean transportation providers closely in 2018 to see whether the effects of carrier concentration are starting to be felt in negotiations and in pricing, as they may have to rethink their vendor contract strategy to align with a narrower base of much larger carriers.

Damas will be sharing his views on rail and intermodal trends when he joins other industry experts on the “2018 Rate Outlook” webcast this January.