Trans Pacific Ocean Rate Review 2017-7-11

Source: JOC.com

US importers in the coming weeks will begin to encounter a tightening of vessel space and occasional equipment shortages, but the likelihood of large rate increases or peak-season surcharges in the eastbound Pacific will be slim this peak season.

That will be a challenge for carriers hoping to improve their bottom line during the peak shipping season after signing at best break-even service contract rates of about $1,300 per 40-foot container to the West Coast and $2,300 to the East Coast. Transportation executives from throughout the supply chain say significant general rate increases (GRIs) or peak-season surcharges in August through October appear unlikely due to a nagging capacity overhang.

In a recent report, Drewry stated that carriers in the major east-west trade lanes this year are recovering some pricing power, certainly when compared with the “rock-bottom” rates that were in effect in the spring and summer of 2016. Nevertheless, rate increases on the spot market have been more muted in the eastbound trans-Pacific, where spot rates are up 33 percent from last summer, compared with the Asia-Europe trade lane, where the increase is 61 percent.

However, spot shortages of space and equipment are possible, and carrier executives are therefore urging retailers and other importers who intend to ramp up their imports from Asia to begin immediately to plan ahead for their space and equipment needs so they are not shut out when the real capacity crunch hits in August and September. While some shipments invariably miss their intended voyages and are “rolled” to a subsequent voyage during the height of the peak season, experts said capacity is sufficient between most port pairs so rolled cargo will be one-off incidents and will not last for a prolonged period.

 

“We have observed marked improvements in the global economic environment since the turn of the year, and we expect a much healthier outlook for the liner sector and a stronger peak season compared to 2016,” said Stephen Ng, director of trade at Orient Overseas Container Line (OOCL).

“We see positive momentum going into the second half of the year,” said an APL spokesman. “APL has already started working closely with our customers on space allocation issues to ensure that their shipping needs and service expectations are met,” the spokesman said.

The spot rate increases tied to GRIs, followed by immediate rate drops, that occurred over the past couple of months, are seen by shippers and carriers as an indication that the peak-shipping season this year will look much like those of recent years.

This is likely to be the case in the trucking and rail sectors as well as ocean shipping. “The past two years, peaks have been relatively mild, with stable service, an earlier start, and a longer finish consistent with improved planning and the new consumer purchasing patterns,” said Mark Yeager, CEO of the LTL management company, Simplified Logistics, and former president of intermodal marketing company Hub Group.

“The peak season curve is not as steep as it used to be,” said Dave Arsenault, president of Logistics Transformation Solutions and former president of the Americas at Hyundai Merchant Marine. He said the spread between the winter slack months and the busy late summer to fall period is not as great as it used to be.

Import volumes are more consistent now throughout the year because of e-commerce purchasing habits that dictate inventory must be in stock in the United States or sales will be lost. The traditional peak will still occur, but it will be less intense compared with the not-too-distant past, and it will be driven by holiday-season items like toys that are placed under the Christmas tree, he said.

However, due to economic growth in the United States, Europe, and Asia there is tighter vessel space and a strain on container and chassis availability in some locations. Zvi Schreiber, CEO of Freightos, said indicators are already present that point to a good peak season. “One of the best indicators of this is air freight pre-booking for [the fourth quarter]. It is already booked up earlier than it was at this time last year, which was a strong year for air freight,” he said.

The spot rates in the eastbound Pacific increased by double digits before a previously announced general rate increase for July 1, but in the week ending July 7 the rates backed off 2 to 3 percent. That development indicated that the full impact of the peak season had not been felt, but the modest drop from the previous week’s spike also demonstrated that vessel space is starting to fill up.

Beneficial cargo owners are urged to meet with their carriers to pre-plan vessel space and equipment needs. “Equipment availability has indeed been tighter than usual due to new regulations requiring water-based paint for new containers. For OOCL, we have taken steps to ensure supply through leasing sources as well as from production of new containers to meet expected demand from customers,” Ng said.

Railroads also appear to be ahead of the curve when it comes to intermodal service. “Rail reliability on the intermodal side is very good,” said transportation analyst Tony Hatch, although he added: “It’s not truck-like.”

There has been some expectation in the trade that completion of the Panama Canal expansion project in June 2016 and the Bayonne Bridge raising project last month will produce a surge in cargo volume at East Coast ports, which could create space issues this peak season.

Schreiber predicts that volumes to the East Coast may be greater early in the peak season, but as it gets closer to the holidays, the more efficient, albeit more costly, West Coast intermodal routing will kick in. Citing last year’s experience, Schreiber noted that West Coast imports increased 1 percent between October and November, and East Coast imports dropped 2 percent.

Containerized imports in the first half of 2017 are predicted to have increased 6.4 percent from the same period last year, according to Global Port Tracker. Ports on the East and West coasts reported exceptionally strong performances in May, the last month for which hard numbers are available, according to PIERS, the JOC.com sister product. Percentage growth in the second half of the year is projected to be healthy, although not quite as robust as in the first half of the year because the numbers will be compared to relatively good growth figures in the second half of 2016.

Early indications from ports that have released hard numbers show that June imports may exceed earlier expectations. The Port of Long Beach reported Monday that imports increased 7 percent, and the Port of Oakland reported that imports increased 5.1 percent, from June 2016.

Projecting container volumes in the eastbound Pacific for the second half of the year is an imprecise science, with some obvious disagreements among forecasters. A survey of freight forwarders and other intermediaries by Mike King and Cathy Roberson is not as bullish as projections by US retailers. Their June APAC Forwarding Index revealed that only 38 percent of respondents predicted that ocean freight shipments in September, which is considered a peak shipping month, would be higher than the volumes recorded in May in the eastbound Pacific. Some 42 percent predicted lower volumes compared with May. “The fall in optimism, at least compared to previous surveys, chimes with recent ocean spot freight rate declines on the major trades,” the authors stated.

The monthly Global Port Tracker published by the National Retail Federation and Hackett Associates is more bullish on the second half of the year. They predict that July and August should be two of the busiest months ever seen for imports at all of the major US gateways. “We’re expecting retailers to import some of the largest volumes of merchandise ever,” said Jonathan Gold, president of supply chain and Customs policy at the NRF. Global Port Tracker predicts that US ports in August will handle 1.75 million TEU container imports, which would be the highest monthly volume recorded since the NRF and Hackett Associates began tracing imports.

Nevertheless, the continued capacity overhang in the Pacific, the introduction of bigger ships by the restructured alliances and the fact that carriers so far this summer have not been able to implement rate hikes that stick for more than a week, all point to modest general rate increases or peak-season surcharges in late summer and fall.

“Rates in the long-haul trades have stabilized and we do not anticipate massive peak-season related surcharges or rate increases from where the market is today,” said Joerg Hoppe, DB Schenker’s director of ocean freight North/Central China. “Space into the US, and to the East Coast especially, is not an issue,” he said.

Even a sudden, unexpected event such as last week’s cyber attack that affected Maersk Line and its APM terminal affiliate, which saw Maersk bookings drop by about 35 percent on the Freightos AcceleRate platform, did not move spot rates, Schreiber said. “Chronic oversupply remains the leading cause of excess capacity this peak season,” he said.

This reality could have a chilling effect on carriers that are filling much of their allotted space with service contract rates of about $1,300 per FEU to the West Coast and $2,300 to the East Coast. Some industry analysts, such as Ed Zaninelli, president of Griffin Creek consulting, considers those to be break-even rates, with peak-season surcharges or GRIs needed to push the carriers to profitability. Others in the industry said break-even is closer to $1,600 and $2,600 per FEU, given today’s higher longshore labor, bunker fuel, and intermodal costs.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.

 

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