Drewry: Contract container rates continue to plummet in early 2016
Rampant overcapacity and the resulting price war between carriers in the container shipping market has caused substantial further reductions in contract rates for exporters and importers buying under contract.Ocean freight rates for cargo moving under contracts on the major east-west trade routes fell by another 18 percent between February and May, according to Drewry’s Benchmarking Club, a closed user group of multinational retailers and manufacturers who closely monitor their contract freight rates. Members range from shippers with annual freight volumes of 5,000 TEU to more than 300,000 TEU.
The Drewry Benchmarking Club Contract Rate Index, based on average transpacific and Asia-Europe contract freight rate data provided confidentially by shippers, has now declined by 29 percent from the beginning of the year to May, as shippers secured, first, big cuts in Asia-Europe annual contract rates and, second, considerable reductions in their transpacific rates effective from May.
In an article in its Container Insight Weekly, Drewry said, "Spot rates in the major container lanes have improved recently, but they still have a long way to go to reach previous levels."
"In recent weeks there have been some large increases in spot rates, particularly in the Asia to Europe trade, which to the uninitiated might suggest that all is now well for ocean carriers and that the profits will start to flow once more. It is true that the still very erratic trend line has been much more positive for carriers since April, but such was the depths that spot rates fell to that any talk of recovery is premature."
In April, Drewry Maritime Equity Research said it “believed container shipping is staring at a terrible 2016 with a structural slowdown in global trade volumes, historical low freight rates and ever increasing capacity could result in an industry losses of $6 billion.” Drewry is expected to come out with a revised forecast next month.
"Data gleaned from first-quarter 2016 carrier financial reports detail an intense rate war between the major carriers, where every one of them suffered severe freight rate decreases," said Drewry. "Maersk Line was at the forefront of the battle with a 26 percent drop in revenue per TEU that contributed to a 7% gain in volumes. Other carriers such as APL, Hanjin and K Line weren’t even compensated with larger volumes for their rate discounts."
"The predatory commercial strategies of the first quarter meant the rate decreases were more severe than they might otherwise have been," it added. "The basic supply and demand fundamentals were actually better for carriers in the first quarter than in both the previous three-months and the same period in 2015 as headhaul ship utilization in the East-West trades averaged close to 90%, aided by void sailings."
“2016 is turning out to be a poor year, although I expect operating losses to be less than $3 billion industry-wide,” said H.J. Tan, executive consultant with Alphaliner. “The weakness is self-inflicted, with carriers chasing freight at loss making freight rates.”
He noted “carriers have already started to withdraw capacity on the weaker routes, which will help to stem the losses.”
Lars Jensen, chief executive officer of SeaIntelligence Consulting did not have a prediction for the losses the carriers will incur in 2016, but said he thought their combined losses will be substantially greater than in 2015.
“The global volume development Jan-Apr 2016 has not been all that bad,” he noted.
Jensen says it is best to analyze supply and demand by looking at global TEU-miles, that is, volumes times distance, “as the distance over which a container is transported has a direct impact on the amount of vessel capacity to perform the transportation.”
“We see that January-April, the global demand grew 2.9 percent year-on-year. If we only look at March-April the growth was a very healthy 5.3 percent,” he said. However, he added, “The problem is that over the past 5 years, demand measured as global TEU-miles has grown 16 percent whereas capacity has grown 40 percent.
“When this is combined, we find that effective global fleet utilization has declined 16 percent over the past 5 years, and this is the fundamental driver of the abysmal situation related to the freight rates - and it is a situation with no simple short-term solution, and even though we have seen good demand growth recently, it cannot resolve the structural imbalance,” Jensen explained.
“We do not presently see major idling of vessels on a global scale, however we have seen a significant reduction of capacity in the Asia-East Coast South America trade which has resulted in much higher, sustained, freight rates.”
Jensen, writing in SeaIntel's Sunday Spotlight newsletter yesterday said the positive growth in TEU-miles in March and April this year is “clearly good news for the industry, but it is a long climb up from the bottom of the market. But as the saying goes: ‘The night is darkest just before the dawn,’ and the market data does currently indicate that end 2015, early 2016 was the bottom of the structural imbalance and we now face the long climb back up.”
Drewry said it has secured for shippers reductions of more than 30 percent for contract rates for new contracts starting from the second quarter via its new eSourcing Ocean Freight Solution, a service it began offering this year.
“The price war between carriers in the container shipping market continues and this is, for now, resulting in substantial reductions in contract rates for exporters and importers buying under contract,” said Philip Damas, head of the logistics practice of Drewry.
"While exporters and importers are enjoying big reductions in their ocean procurement costs this year, the next trend for shippers could be how to identify and work more with carriers who can maintain reliable service levels despite their revenue pressures and the risk of carrier or alliance service instability," said Drewry.