If 2015 is any indication for ocean freight rates, expect the unexpected. Plagued by slow global trade and overcapacity, 2015 was one of the most volatile rate markets in recent history. Ocean carriers struggled to make a profit, but it’s not all doom and gloom – the clear winners were shippers as those who could ride the wave of instability saw drastic rate drops.
With 2015 so volatile, how can importers budget for 2016? We have put together the indicators which should help you have a better understanding of what to expect in terms of ocean freight rates from China to USA in the coming year. And ironically, a lot of it is based on the instability from 2015.
2015 Recap – What Happened?
To understand why 2015 was such an outlier, it is important to understand the typical yearly freight rate trends:
- Early Q1 – rates tend to pick up prior to the impending Chinese New Year (CNY), usually around February, and the weeks immediately following the holiday to ship a backlog of products that weren’t able to load prior to the CNY.
- Mid to late Q1: yearly shipping rate cycle usually slows down after CNY and rates tend to drop back down to normal levels.
- Early Q2: carrier contracts are renewed causing a Trans-Pacific cargo rush. Carriers tend to markup rates since BCOs need to meet their minimum quantity commitments to apply for a contract renewal.
- Late Q2: carriers start to announce GRIs at the start of each month, which could decrease or be cancelled altogether depending on demand
- Q3: carriers start implementing additional PSS because of the increased demand for the holiday season.
- Mid to Late Q4: Cargo rates drop back down for the next few months through the Chinese New Year. There is a small uptick at the end of Q4 before Christmas with importers trying to get cargo out before the mad dash before CNY.
But for 2015, freight rates didn’t follow normal practices. According to Kelly Ng, LILLY + Associates Country Manager of China, ocean freight rates actually started to decline from July 2015 through October 2015, so peak season didn’t even manage to cover carrier costs during the slow holiday season. Based on that fact alone, Ng believes the shipping industry can’t rely on usual indicators for 2016 forecasting.
I’m not sure anyone could have predicted the wild ride that the shipping industry went for this past year. Baseline rates for China imports to the U.S. were slashed from a half to a third from what they were in 2014. If the dollar wasn’t gaining strength and without regulation from the industries regulatory body (FMC), we could have seen rates drop even more like they did in other markets. We saw China to Brazil container rates drop down to $50 USD (yes, $50!) – and China to EU container rates drop so low carriers couldn’t cover fuel costs. It is no wonder that we are continuing to see the shakeup of the industry like we are seeing now – carriers cannot cover their expenses.
Mergers, cost-cutting measures, and bankruptcies while the shipping industry struggled to turn a profit meant sometimes daily fluctuations of freight rates. Carriers were announcing GRIs in nearly equal to baseline ocean freight at the beginning of the month to cover their costs only to slash it as the weeks went by. While these fluctuations made it more difficult to forecast, shippers who could afford to be more flexible were able to use the instability to their advantage.
2016 – How the Global Economy Will Impact Rates
So what does this all mean for 2016? To “predict” freight rates, we need to first understand global demand. If less goods are being shipped, demand is low. When demand is low, carriers cannot fill up their vessels and the industry is more unpredictable. While we are focusing on the U.S.-China import rates, these economies are susceptible to outside shocks as much as they create them for the rest of the world.
First, let’s look at the United States.
The U.S. dollar has been steadily increasing, increasing imports and decreasing exports. Employment has been stable, consumption has been firm and some economists believe that the U.S. could be the lead to reverse, albeit slowly, the overall slowdown in global trade or just stay at the same “good but not great” state. With oil prices low and potentially continuing to drop, U.S. households will have more funds and consumerism should increase, that is, if consumer confidence increases. With the strong dollar, foreign markets will be clamoring to import goods into the U.S. and exporters of U.S. based products will have more difficulty competing in the global economy. This should indicate a trade deficit, and for purposes of import rates, a minimal increase in demand.
For the rest of the global economy – if GDP is expected to increase (OECD predicts 3.3 percent), Europe will improve somewhat and India will be poised for large growth (OECD predicts 7.3% percent). Commodities-based economies, like the majority of Latin America, are still hurting from the sharp decrease in prices. According to Forbes, commodities prices are still 30 percent lower than their 2011 peak, slowing production levels and project infrastructure. Imports to LATAM will still be slow, and businesses tied to this trade will be affected.
The biggest wildcard for the global economy in 2016 is China.
We have seen wages continually rise, consumerism increase and the absolutely insane 10 percent growth for a decade “slow” to 6.9 percent – or so the government says. The official numbers tend not to be reliable. Quite frankly, no economists believe their official number and believe it’s somewhere between mid-4 to 5 percent. Even though this growth figure still sounds great compared to the rest of the global economy, the unprecedented growth was fueled by unsustainable stimulus dollars leading to debt growing twice as fast as its economy. This slowdown is holding the rest of the world back in terms of GDP. If any jolt is given from China to the rest of the world, we could see the modest global growth predictions of 3.3 percent decrease – lowering demand. China is still buying less, but exports to the U.S. should still be stable.
Industry Shakeups – More Instability
As if the unstable economic outlook wasn’t enough, the ocean freight industry is going through a bit of a shakeup. Global ocean freight carriers will still be squeezed for the foreseeable future. The modest growth levels won’t be enough to get carriers out of the red without continued cost saving measures. While it isn’t pleasant for the carriers and its employees, this could spur industry innovation in an otherwise stagnant industry.
One of these innovations is carrier’s investments in large capacity vessels. They are more efficient, carrying more cargo with less fuel consumption. While this is great news for cost saving, the Wall Street Journal reports that these ships have swollen the world’s fleet, estimating “the industry suffers from as much as 30% overcapacity on some of the busiest ocean trade routes. … New ship deliveries will boost capacity by 1.7 million containers, or 8.2%, while demand growth should top out at 2% this year, the lowest since 2009.”
As a result of this, alliances and mergers are absolutely necessary. In this mad dash, size matters if the carriers are going to be profitable. To give an idea of how unstable the market is, we’ve compiled the recent mergers and alliances necessary for the carriers to stay afloat:
- Hapag-Lloyd and CSAV merged in 2014
- State-backed Chinese carrier Cosco and China Shipping are set to reveal merger
- It was just recently announced that CMA CGM entered a deal to buy NOL (operating under APL brand)
- CMA CGM seeks regulatory approval of its $2.4 billion acquisition of the parent company of G6 member APL.
- If those consolidations occur, the new alliance structure would look like this:
- 2M: Maersk, after failing to garner support from China for a mega alliance with MSC and CMA CGM, aligned itself with MSC
- G6: OOCL, Hapag-Lloyd, NYK, Hyundai, MOL and maybe Hamburg Sud. (APL would drop, Hamburg Sud might be a viable option to join post-merger per Chas Deller, a partner in 10XOceanSolutions.)
- KYHE: “K” Line, Yang Ming, Evergreen, Hanjin
- 05: Originally CMA CGM, China Shipping and UASC, now it would include APL and Cosco if mergers are approved.
Specifically for the U.S. East Coast imports from Asia, we should see a shift in trade patterns as well that carriers will have to grapple with. The Panama Canal expansion nearing completion at 96 percent, U.S. East Coast ports are poised to take cargo away from the U.S. West Coast with deep dredging projects completed. These ships weren’t able to pass the Canal previously, so shippers who favor the U.S. West Coast (mainly LA/LB) can ship closer to distribution centers or headquarters located in the East Coast. Carriers will be seeking to find the new U.S. East Coast/West Coast balance in a post-Panamax world between an increased TEU supply, sailing frequencies, and market demand. We expect this to cause near-term instability in rates.
Where the Industry Rates Are at Now
As you start to tentatively plan your shipping year, keep in mind that several carriers have already announced GRIs for January 1, 2016 at nearly double the rate seen in January 2015. That being said, base rates are only a fraction of the cost from 2015 and these GRIs are anything but stable. Additional GRI adjustments could happen from January to March, as well, thanks to high cargo volume before and after the Chinese New Year.
That all being said, stay flexible with your expectations and you can leverage the instability and overcapacity of the ocean freight market to your advantage. With ocean shipments making up around 95 percent of all global shipping, there will be no quick fixes to the “new normal” for freight carriers.
We’re curious: do you think rates for ocean freight from China to the US will be unstable in 2016 like they were this year? Leave a comment so we can discuss!