2017 Contract Season Update 2017-2-2

Source:  JOC.com

Higher than usual sailing cancellations during Chinese New Year on the trans­Pacific and Asia­Europe trade lanes is the latest example of ocean carrier capacity discipline amid annual contract negotiations.

The deep capacity cuts forecast by SeaIntel come as spot rates on both trades are at least 50 percent higher than those quoted last year a week before Chinese New Year celebrations began on Feb. 7, kicking off a two­week shuttering of Asian factories. Blanked sailings are at their highest level in four years, and although trans­Pacific cuts will be deeper than last year, they won’t be as drastic as they were around the Chinese New Year in 2014 and 2015, SeaIntel Maritime Analysis CEO and partner Alan Murphy told JOC.com.

“Based on patterns of spot rate developments in past years, we are expecting spot rates on Asia­Europe and trans­Pacific to drop 15 percent to 20 percent in the coming weeks, but second­quarter spot rates we estimate to be up 90 percent to 150 percent year­over­year on Asia­Europe and 150 percent to 170 percent year­over­year on Asia to US West Coast,” he said.

Asked about the heavy capacity cuts expected in the next couple of weeks, a spokesperson for Orient Overseas Container Line said: “It is important that carriers constantly keep a close eye on the changes in the market and the performance of their products to ensure they are meeting customers’ requirements.”

The extent to which trans­Pacific and westbound Asia­Europe spot rates hold, or more likely, fall, give shippers insights (http://www.joc.com/maritime­news/trade­lanes/trans­pacific/trans­pac­spot­rates­signal­state­carrier­discipline_20170124.html) into just how much discipline carriers will have in matching capacity to demand, rather than chasing volume at lower rates. The spot rates are taken as a base on which to negotiate contracts.

While the majority of Asia­Europe service contracts are negotiated toward the end of the year, some large shippers are still in talks.

The supply chain director of a global European retailer said, “We negotiate rates from April­March so it gives us the benefit of a few months to see what happens to the market, but suffice to say we’re expecting relatively significant increases over [2016] rates and less choice for us given the consolidation that’s happening in the market place.”

Another Asia­ based global shipper said his company only opened its tender in January and would not know the scale of the increases until early February.

“We are certainly hoping for a price war, but the real market won’t show its face until the other side of Chinese New Year” he said.

Compared with a 10­ week average of pre­Chinese New Year capacity, Asia­ Europe carriers will cut capacity 40 percent in the first week after Chinese New Year, 25 percent in the second week, and 31 percent in the third week, according to SeaIntel.

Asia­ Europe carriers slashed capacity more dramatically in the first week of the Chinese New Year in 2016, reducing space available by nearly 53 percent. Although carriers pulled back in the following two weeks, reducing capacity 20 percent and adding nearly 1 percent, respectively.

On the trans­Pacific, SeaIntel expects carriers to cut nearly 27 percent of capacity in the first week of the Chinese New Year, and then 19 percent in the second week and nearly 4 percent in the third. Those are far sharper cuts then during Chinese New Year in 2016, when capacity shrunk 11 percent in the first week and 18 percent the second, before 2.5 percent more space became available the in third week, according to SeaIntel.

Heading into the Chinese New Year, trans­Pacific spot rates measured by the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index to the West and East Coasts are 77 percent and 55 percent higher than the week before the lunar celebration last year, respectively. The current spot rates to move a 40­foot­equivalent unit from Asia to the US East and West Coasts are both higher than many of the 2017­2018 contracts carriers are trying to secure from major retail BCOs.

The rate to the West Coast is $2,167 and the East Coast rate is $3,647, while carriers are seeking to lock down annual contracts, which generally run from May 2017 to May 2018, in the range of $1,600 to $1,800 per FEU to the West Coast and about $2,450 per FEU to the East Coast, according to conversations with carriers, shippers, and consultants.

After some major shippers signed contracts last season for as little as $750 per FEU to the West Coast, contributing to the billions of industry­wide losses in 2016, carriers are putting on the pressure. Some carriers, for example, are asking shippers for rates $100 to $300 higher than what was being shopped around in late December and early January, arguing they can lock down rates now or risk higher costs once they get alliance network details.

The Ocean Alliance has detailed nearly all its port rotations, but THE Alliance hasn’t disclosed specific ports for network placeholders, such as “South China/Hong Kong,” “Los Angeles/Long Beach,” and “Caribbean Hub,” according to SeaIntel. The analyst expects the network of the 2M, now with a Hyundai Merchant Marine partnership component, to remain unchanged.

Depending on the relationship with the customer, how the contract is structured, and how much volume is committed, carriers may settle for West Coast rates of $1,000, and $2,300 to the East Coast, a container line executive told JOC.com last week on the condition of anonymity. Still, these are hardly major advances, considering a $1,600 to $1,700 rate was once considered poor, the executive said.

Whether carrier discipline will hold is unknown, but they do have some momentum. The capacity cuts that have been made, and are to continue, have helped prop up spot rates, according to data from Xeneta. The rate management platform looked at the spot rate developments around Chinese New Year 2016 compared with this year and found that on the day before the Chinese holiday began, the market average spot rate in 2017 was almost double that of 2016.

On the Asia­North Europe trade this year, the market average rate the day before Chinese New Year on Jan. 27 was $2,301 per 20­ foot ­equivalent unit compared with $1,057 on the same day the year before. By March 7 in 2016, the market average spot rate had plunged to $695 per FEU.

It was the same picture on the Asia­Mediterranean trade. On Jan. 27 2017, the market average was $2,057 per TEU, while it was $861 per TEU on the same day just before the Chinese New Year in 2016. The spot rate had declined to $504 per TEU by March 7.

Patrik Berglund, Xeneta CEO, said how the short­term market developed after the Chinese New Year would be important. Noting that carriers have shown capacity discipline in the past only to fold later, Berglund told JOC.com that this time around alliances have all trimmed capacity at generally equal levels, boding well for a measured approach — at least in the short term.

“If, as we’ve seen historically, it plummets quickly after that then it might very well rapidly change from a seller’s to a buyer’s market again,” he said. “If it sticks, the shippers sitting on the fence, waiting for Chinese New Year to blow over might have lost out on the opportunity to contract, as they’ve done historically, according to the calendar year for Europe and then, as quickly as possible, for the trans­Pacific corridor.”

Contact Greg Knowler at greg.knowler@ihsmarkit.com

Contact Mark Szakonyi at mark.szakonyi@ihsmarkit.com

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