Friday, April 15, 2016

MORE TO RAISE QUESTION OF WHY SHIPPERS SHOULD SIGN CONTAINER LINE CONTRACTS

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Will long term contracts lose their appeal?

Rates to North West Europe fell just $20 this Friday to $271 TEU. Although the rate of decline has slowed somewhat compared to previous weeks, at their present level they remain precariously close to the all-time low recorded on the route just 4 weeks ago.

Last week we saw several carriers begin to announce the next round of GRI’s and this week has been no different with several additional lines joining the party. Maersk Line's still remains the lowest of the planned increases at $550 TEU, whilst CMA CGM plans to implement a rate restoration programme of $750 TEU effective May 1st. Elsewhere UASC and Cosco plan to increase rates by $800 and $600 respectively.

Even if these latest increase are successful rates are likely to quickly come under pressure again. According to data from Xeneta, since Q2-2015 spot rates on average have remained lower than long term contracts on the trade, raising the question as to whether the time and effort associated with negotiating fixed contracts outweighs the benefits. (See chart below)
Of course the stability provided by fixed contracts can be appeal to some shippers. However we can see that since Q2-2015 the premium to achieve this has been as high as 50% compared to the average spot price. The question is whether this premium represents value for money given the depressed market and the likelihood for continued spot rate pressure?

An alternative would be for shippers to pay spot and manage their own future rate risk, a common practice in other commoditised markets with an active corresponding futures market. This would allow shippers a flexible approach, whereby they can benefit from a weak spot market and protect i.e. fix their future costs when there is a requirement to do so, without the need for lengthy and therefore costly contract negotiations with carriers.

In other commoditised markets capped rates are also achievable, providing users with a limit on future costs. With a fully active futures market this contract format would be achievable to shippers, providing them with the best of both a falling spot market and a cap on any future potential rate increases.

Container freight futures for May on the North West Europe route have been trading between $350 TEU and $237 TEU and are currently trading around $238 TEU. Shippers using such products can potentially fix their future spot costs at around this level, providing them with future rate security and protecting themselves against the planned GRI’s.  
Elsewhere rates out of North America’s West Coast to China Main ports have fallen significantly since the middle of March. The Xeneta platform shows that the lowest spot rates on this trade have fallen from $284 TEU reported on March 18th to just $92 as of April 15th, a drop of 67.6%.

Sources: Shanghai Shipping Freight Exchange, Xeneta platform