Trans-Pacific container lines got a reprieve from sliding freight rates this week when they put a general rate increase into effect on May 21, but freight rates are likely to continue to slide in the major east-west trades because some carriers continue to slash rates after repeated GRIs in an effort to gain market share.
“Carriers need to cut capacity if they are to prevent the slide in rates,” said Martin Dixon, research manager for freight rate benchmarking at Drewry Shipping Consultants. “They can, but the issue is whether they have the will to do it.”
Dixon said some carriers are offering rates below the benchmark rates that are being published for both the trans-Pacific and Asia-Europe trades. “It’s indicative of a falling market. That’s why it’s dangerous unless action is taken to reduce capacity.”
The rate war is not as intense in the trans-Pacific, but shippers have been able to renegotiate contract rates downward. Carriers implemented the May 21 GRI to raise the prices paid by non-vessel-operating common carriers, which ship containers for their customers mostly at spot rates. They are also trying to head off efforts by some trans-Pacific shippers to renegotiate their annual contracts to take advantage of falling spot rates.
Dixon said shippers that negotiated annual contracts at the start of 2013 when the spot market was stronger are going back to their carriers to have those rates renegotiated in light of the falling spot rates. “We’ve heard of a number of instances where shippers have been successful in getting a lower rate than the rate they started off the year with,” he said. “That’s why this week’s GRI is so important to carriers in terms of heading off further developments on that score.”
Carriers are likely to take steps to halt the slide at some point this year to avoid further losses. “Rate levels are way below break-even levels, especially, in the Asia-Europe trade, and carriers are already carrying a lot of debt, and they are only adding to that debt by moving cargo at these rates,” Dixon said. But he said he is not aware of any specific plans to remove capacity.
The Drewry benchmark for average spot rates in the eastbound trans-Pacific trade from Hong Kong to Los Angeles jumped by $250, or 13.2 percent, to $2,150 per 40-foot-equivalent unit when several carriers including Cosco, Wan Hai, Hapag-Lloyd and MOL put a GRI into effect on May 21.
But if past patterns hold, that spot rate will begin to decline over the next few weeks as one or more carriers starts to cut rates again. For example, the Drewry benchmark increased 14.9 percent to $2,500 per FEU after the April 1 GRI, but is $350 per FEU lower than that even after this week’s GRI. “It’s questionable how sustainable these rate increases will prove to be,” Dixon said.
The same pattern holds true for the Asia-Europe trade, where the Shanghai Containerized Freight Index fell below $1,000 per 20-foot-equivalent unit last week despite GRIs on May 15 of between $500 and $600 per TEU by Hapag-Lloyd, Cosco and UASC.
Dixon said carriers are getting into a quandary similar to what they faced in the last quarter of 2011 when they started withdrawing capacity. “That enabled them to have the discipline to force up rates,” he said.
Although carriers did suspend some services this winter and voided some sailings, they did not withdraw services permanently. Quite the opposite, they have added capacity on the Asia-Europe trade, “so we’ve seen rate levels fall correspondingly.”
As a result, vessel capacity utilization is in far worse shape in the Asia-Europe trade than the trans-Pacific, he said.