1st Quarter 2017 Ocean Import Rate Update

JOC.com

There is little expectation that the solid increase in freight rates that built through December and into the new year will last as container shipping’s weak fundamentals reassert themselves in the slack post-Chinese New Year period.

Asia-Europe spot freight rates reached their highest level since July 1 in the final week of December, continuing a steady increase that began late in the first quarter. The year-end rate rise was even more dramatic on the Asia-US East Coast route, which hit its highest level of the year on Dec. 30, passing the $3,000 per 40-foot-equivalent unit mark in the process. Rates are updated weekly at JOC.com’s Market Data Hub.

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Sanne Manders, chief operating officer of Flexport, told JOC.com that shipping lines were using the uncertainty in the market to raise rates, and that a shipper negotiating a contract right now would be paying 20 to 25 percent more than last year.

“There was a perfect storm in the last five months with Hanjin Shipping’s failure and the peak season coming at the same time, which allowed the shipping lines to bring up the rates,” he said. “But this will be temporary. If you look at the underlying fundamental economics, the overcapacity remains, so what you will see is that the rates will go back to the same low base rates that we saw last year.”

Manders said the economics could not be escaped and overcapacity was here to stay.
“There will always be moments when rates will spike — before China’s ‘Golden Week’ in October or in the weeks before Chinese New Year because of front loading to get the goods out of the factories. But beyond Chinese New Year, the prices should go down,” he said.

This view was supported by Lars Jensen, CEO and partner at SeaIntelligence Consulting, who wrote in his blog that the lingering effects of the Hanjin collapse and the associated “flight to safety” from some shippers might underpin rates, but this did not sustainably change the supply-demand dynamics.

“That being said, it is entirely plausible that rate levels in the beginning of 2017 will show marked improvements over 2016, but that is because the start of 2016 had rate levels hitting absurdly low levels on the back of a very low oil price and a dysfunctional price-setting mechanism among the carriers,” he said.

Jensen also believes the phase-in of the Ocean Alliance and THE Alliance from April carries with it a high risk of a price war, and said it was inevitable the new alliances would want to assert their positions in the key markets.

Accompanying the rise in spot market rates in the run up to the new year was an increase of Chinese manufacturing. Factory production in December expanded at the fastest pace in nearly six years, according to the Caixin China general manufacturing PMI.

Some expect the sustained increases in container shipping rates through the fourth quarter will not be sustainable throughout 2017.

Supported by a solid increase in total new orders, companies raised their purchasing activity at a quicker rate than in November. December recorded a PMI of 51.9, the strongest reading since January 2013. Anything over 50 is regarded as expansion.

Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said the sub- indices for factory output and new orders both hit multi-year highs, and those for input costs and output charges continued to rise rapidly, underlining sustained inflationary pressure.

“The Chinese manufacturing economy continued to improve in December, with the majority of sub-indices looking optimistic,” he said. “However, it is still to be seen if the stabilization of the economy is consolidated due to uncertainties in whether restocking and consumer price rises can be sustainable.”

The Caixin China report on general manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 500 manufacturing companies. It is a composite indicator designed to provide a single-figure snapshot of operating conditions in the mainland manufacturing economy.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.

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