Spot market container freight rate volatility intensified in 2015 and Drewry Maritime Advisors has released its latest container insight report, which looks at the likelihood that freight rates will continue to decline.
Some of 2015’s rate erosion and volatility was linked to falling oil prices but it was also a consequence of the ever widening gaps between supply and demand.
Drewry found that factors such as the greater use of missed sailings and peaky demand saw monthly load factors, and subsequently rates, move up and down more frequently.
Carriers also have themselves to blame for the race to bottom by readily accepting cargoes at sub-economic levels, while the USWC labour-related slowdown and the impending widening of the Panama Canal also played a part.
Weekly spot rates in the East-West container trades have continued their now well-worn pattern in the first weeks of 2016; a sudden spike at the start of the month induced by some headline-grabbing general rate increase (often in the region of US$1,000 per TEU, and sometimes higher) from carriers, followed by the inevitable backslide as the month progresses.
The World Container Index – a joint venture between Drewry and Cleartrade Exchange – reported that its weighted-average index of 11 East-West lanes increased by 67% in the first week of January, 2016.
That gain, equivalent to $1,225 per TEU, was sustained in the second week but thereafter two successive decreases wiped out nearly 60% of the initial hike.
To try to quantify the extent of the rate volatility, Drewry has undertaken some statistical analysis of the World Container Index data for the headhaul East-West lanes, back to its first full-year series in 2012.
The headline news from the analysis is that freight rates are generally heading south and that the variance is widening, dramatically so in 2015.
At the same time, the analysis reveals that carriers’ attempts to increase rates through GRIs are increasingly ineffective.
The spread between the highest and lowest weekly rates was over $1,000 in three of Drewry’s sample lanes, with four lanes seeing that spread widen by over $300 from 2014.
Shanghai to New York, by far, had both the highest spread in 2015 and the biggest increase over 2014 as the trade went from the early-year rate highs of nearly $2,500 per TEU when cargo was being diverted from the US West Coast (USWC) ports to later-year lows of just $750 per TEU.
Having such a wide spread of rates lessons shippers’ chances of actually securing the 12-month average.
Clearly, rapidly diminishing freight rates spells bad news for carrier revenue, but for shippers does it really matter if they have to put up with wild price swings if the average cost keeps coming down?
For carriers, freight rate volatility presents a myriad of problems. Firstly, the wild swings are often divorced from the supply-demand fundamentals and without that basis they become price takers (further fuelling the volatility) simply to maintain market share.
Every one of the lanes experienced more losses than wins with the Asia-Europe and Transpacific lanes faring significantly worse than the Transatlantic lanes.
However, while the Transatlantic had more ‘wins’, they were much smaller in dollar terms with average rate gain being only between $10-15 per TEU, depending on the leg.
Drewry believe that one way for handling low rates is to embrace freight rate volatility and to be fully engaged in the spot market to take short term commitments with varying carriers, in order to make sure they have the best possible rate at all times.
Drewry View: Drewry expects East-West container rates to decline again in 2016. It’s harder to judge whether volatility, which will definitely remain a feature, will get significantly worse. Much will depend on the stability of oil prices, while the impact of the newly enlarged Panama Canal and alliance restructuring towards the end of the year could also trigger sudden blips one way or another.