Trans Pacific Space Tightening – 2017-8-25

Source:  JOC.com

With indications that an unusually strong peak season is under way, fueled by a buoyant US economy, space in the eastbound trans-Pacific is tightening and carriers are aiming to put the highest yielding cargo on ships. That will force shippers with lower-rated cargo to pay higher rates or face delays.

“We believe that the short-term future is that there will be some issues on space, maybe for the next two-and-one-half months,” Chas Deller, president of 10X Ocean Solutions, which advises beneficial cargo owners in contract negotiations with carriers, told JOC.com on Thursday. “The customer will have little choice but to pay more than they paid last year in order to get their freight on board.”

A medium-sized US importer said finding slot space has become trickier in recent weeks and wondered whether the collapse of Hanjin has spurred the tightness. “This summer is just absolutely unbelievable,” she said.

Import volumes from Asia to the United States rose 4.2 percent in the first half but grew 7 percent in July, according to PIERS, a sister product of JOC.com. US containerized imports in August may hit a monthly record high, with imports forecast by Global Port Tracker to rise 2.1 percent, to 1.75 million TEU.

Despite the growth, the spot rate to move an FEU from Shanghai to the US West Coast and East Coast has been largely static for the last three weeks, according to the Shanghai Containerized Freight Index. The spot rate to the West Coast is $1,659 per FEU and $2,592 to the East Coast. Rates on both routes, though, are up more than 50 percent since June.

“It is becoming a carrier market right now,” said Joe Quartarolo, executive vice president of global freight forwarding at Empire Worldwide Logistics. “They’re in control and they will be selective on what cargo gets on board the vessels based on each of the loading ports’ decisions to maximize profits.”

The situation is one that may be unfamiliar to many shippers who have enjoyed the fruits of a very weak container shipping market over the past several years, winning successive year-over-year rate reductions that shipper companies have gotten used to. The situation began turning around during the 2017 contract negotiations when carriers were able to secure modest increases of a few hundred dollars per FEU, turning the tide from the prior year when some rates were in the $700 range. But the situation has only tightened since, with growth rates in the import trans-Pacific accelerating.

“As as long as we see these 5, 6, 7 percent growth indications with capacity not increasing by that much, the carriers will be once again in charge. We’re seeing once again a complete reversal from the psychology that we have seen in the last couple of years,” Deller said.

The tightness of space is not just costing shippers more, it is adding an element of unpredictability to importers’ supply chains, Deller said.

“And the issue with [the space situation] is that you then begin to lose confidence that your product will arrive when you want it to arrive. The whole point from an importer’s perspective in the trans-Pacific is … these products have to arrive, so customers have been saying to us, ‘I don’t care about the rate negotiations, the freight has to move and it has to be here on time.’ So the only way to do that is to bow to the carrier’s demand.”

The tightening trans-Pacific import market supports comments made by Maersk CEO Soren Skou in the company’s Aug. 16 second-quarter earnings call where he said, “We believe that what we see now is probably the strongest fundamentals for container shipping that we’ve had for quite a while and certainly since 2010 and the financial crisis.”

He pointed to the fact that the idle fleet globally has dropped to just over 2 percent as many ships have been activated in recent months, but rate levels are holding in an indication that trade volumes this year are strong. For the first time in a decade economies in the United States, Europe, and the developing world are all expanding simultaneously.

“You’ve seen very little movement in the past few months despite the fact that a lot of idle capacity has been deployed. And I think we’ll take that as a sign of strength in the market,” Skou told analysts.

What appears to be happening is a peak season that has arrived with a vengeance, driven by a strengthening US economy. Real US GDP growth bounced back in the second quarter, rising at a solid 2.6 percent annual rate, compared with an anemic 1.2 percent in the first quarter, according to IHS Markit projections, which anticipate that GDP growth this year will accelerate to 2.1 percent.

“Even though the last couple of years the peak season was almost non-existent, this year it’s a real peak season. We see space becoming very tight at origin. It’s been tight for the past several weeks,” said Quartarolo.

He said the heavy volumes are being seen in delays at Pacific Northwest ports and at rail ramps around Chicago, creating delays of several hours to a few days.

He said spot rates are currently $500 to $600 higher than rates negotiated this spring during annual service contract negotiations, which creates a big incentive for carriers to load higher-paying cargo first, to the degree they are able to.

“Obviously you have the fixed long-term rates negotiated back in April and May, and then you have the spot market rates. So of course they would like to load the high-paying cargo rather than the low-paying cargo. They are not going to eliminate the fixed-rate volume but they will reduce it,” he said.

Deller said likely loading delays will force some shippers to turn to air cargo. The tightness in ocean space “will have a knock-on effect on air cargo, because if you can’t get on board and are delayed for a couple of weeks and you miss a projected sale, you are going to fly it no matter what.”

Shippers turning to air will find a tight airfreight market as well. As the forwarder Flexport reported on Aug. 15, “This has been a huge year for airfreight. Rates have stayed high and will rise further in the peak season. The trans-Pacific air market in particular is very strong.”

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Contact Peter Tirschwell at peter.tirschwell@ihsmarkit.com and follow him on Twitter: @petertirschwell.

 

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