The seasonal downtrends for spot rates on the Eastbound Trans-Pacific lines have continued unabated. There are still no major developments which can move the market this week. Some of the key developments to watch out for include a New Alliance service that is expected to be launched this April (2017). It is also expected that there will be some blank sailing during late March and early April. That means that space will be at a premium during that period.
April is an interesting month because it traditionally has a cargo rush. The reasons for this stem from the fact that it is the last month to fulfill the contract terms of the TP trade. Hence the coming weeks are likely to be very tight. On the first of April, a GRI will come into effect. Another one is anticipated around the 15th of April. The final rate in April is not yet known but most experts agree that the April rate will be higher than that in March.
What impacts spot rates?
There are three main reasons for changes in spot rates. They include the container volumes, the level of vessel utilization and also the existence of vessel-sharing alliances. All these factors are happening in the industry; particularly after the upheavals of 2016. This year is intriguing because it represents a fresh start of sorts. For example, vessel utilization rates on the trans-Pacific have fallen following the Lunar New Year. The Eastbound Trans-Pacific spot rates fell this week. In practical terms, it means that a 40-foot equivalent unit (FEU) has experienced a decline of 6% in its spot rates last week on both the East and West coasts.
Some interesting statistics are coming out of the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index. The East Coast rate was hovering on $2,721 per FEU; a fall from the quoted figure of $2,887 from last week. The West Coast rate was $1,338; another decline from the $1,424 of last week. It is notable that the spot rates have declined week-on-week; with a few single digit increments. This is a trend that has embedded since the peak of mid-January 2017 where rates of up to $3,647 FEU were reported to the East Coast and $2,211 to the West Coast.
The figures quoted are not alarming at this time of the year because the cargo volumes have typically dropped off as many factories close up for the Chinese New Year. Nevertheless; it is expected that in the coming weeks the volumes will begin to pick up. The peak season will be in the late summer and fall. Towards that point, there will be a noticeable acceleration in volumes.
Advantages for carriers
It is important to note that some carriers may be missing out on a wonderful chance to lock in contracts that are more favorable than ever. This is based on the fact that the 2017 spot rates are relatively strong when compared to previous years. The beauty of negotiating contracts when spot rates are high is that they provide the service provider with the ultimate leverage, amplifying their influence on the contract setting process. Of course, we cannot forget the impact of the Hanjin bankruptcy, which essentially means that there is a dearth of strong competition. That is not discounting the alliances that have sprung up since. Nevertheless; this is a good time to negotiate contracts and lock them in.
The experts have noted the traditional impact of vessel utilization on spot rates and advise that carriers strike while the iron is hot. That means that when the slack period of the year comes up, the firms that are locked in do not have to worry about excess capacity. It is advisable to take note of the figures that were released on Friday by the Transpacific Stabilization Agreement (a consortium of major carriers). These figures showed that at the beginning of February 2017 the utilization rates on the major routes to the West and East were hovering between 90% and 96%.
By the end of February, that had changed with the rates falling to between 76% and 86%. The Chinese New Year festivities were blamed for the decline. The Panama and Suez canals were performing slightly better with utilization at between 82% and 89%. Kevin Krause of SEKO is one of the insiders who argue that the container volumes in the eastbound Pacific are normal for the year. That optimism is not fully shared by other carriers who are not making long-term plans but instead try to get customers to sign service contracts for the period running from the 1st of May 2017 to the 30th of April 2018.
According to Krause, the slow trade is due to the restructuring that is taking place as a consequence of the vessel-sharing alliances that came out of the Hanjin debacle. Currently, there are four major alliances that will be turned into three, starting from the 1st of April 2017. We already have the rotations for the 2M Alliance, THE Alliance and The Ocean Alliance. The only thing missing is the size of their vessels on the Trans-Pacific services as well as the container terminal calls for each week. Krause has complained about the general statements that are not specifying the critical details.
SEKO is one of the non-vessel-operating common carriers that are facing uncertainty. The pressure is on to sign beneficial annual contracts with cargo owners. They need the information from the alliances in order to give accurate quotations. Either way, this is the time to lock in contracts with the East Coast rate being 64% higher than a comparative week in 2016 ($1,659 per FEU). The West Coast rate is 76% higher than week 11 of 2016.
The predictions are just that and nothing more. For example; if the annual service contract rates are below the break-even rate, it is anticipated that the carriers will try to catch up during periods of high demand. As vessel space tightens, there will be an increase in general spot rates. In case the predicted strong holiday season comes to pass, there will be a rush to implement peak rate surcharges particularly in November. The overarching advice is to get the contracts going now.