When trans-Pacific eastbound spot rates plunged nearly 9 percent in the week ending July 10, it was the latest example that container shipping pricing this year has lost its staying power. The decline, after all, came hard on the heels of carriers’ successful July 1 general rate increase, continuing a prevailing pattern of rate erosion that has followed every GRI this year on the major east-west container trades.
“On the trans-Pacific, the carriers are certainly not favored by supply and demand,” said Lars Jensen, CEO of SeaIntel Maritime Analysis in Copenhagen. “In round numbers, capacity is up around 10 percent on services from Asia to both the East and West coasts, and demand, though not completely anemic, is nowhere near 10 percent growth.”
The average spot rate from Hong Kong to Los Angeles dropped by $200, to $2,036 per 40-foot-equivalent unit, between July 3 and 10, according to the Container Rate Benchmark published by London-based consultant and analyst Drewry. The decline represents half of the $400-per-FEU general rate increase that carriers implemented on July 1.
“In previous GRIs, whatever traction the carriers gained in the first couple of days has generally been lost in the next seven to 10 days, so then the carriers are back to Square One,” said Neil Dekker, head of container research at Drewry Shipping Consultants in London. “Then they’ve had another GRI the following month.”
After this week’s 8.9 percent drop, the Drewry trans-Pacific benchmark is down 16.7 percent year-over-year. “The decline is largely driven by the cascading of larger vessels into the trade, which is hurting the rates,” Jensen said. “It will be very difficult on the trans-Pacific for carriers to have long-term sustainable rate increases because supply-demand is not working in their favor.”
In addition to cascading of capacity onto the trans-Pacific, some carriers have launched new services. Evergreen Line in May launched a new CPS-2 service with 4,500-TEU ships that calls Shanghai and Ningbo in China and Los Angeles and Oakland in the United States. China Shipping and United Arab Shipping in the spring also started a new joint service between South China and the U.S. Southwest. “That’s capacity that isn’t really needed in terms of demand growth,” Dekker said.
Vessel utilization factors on the trans-Pacific are running from 84 to 94 percent, depending on the port pairs and services. “The feedback I’ve had in the last month is that ships are by no means running full, but not as bad as on Asia-Europe,” Dekker said. “I’ve not heard anything from carriers and shippers that there is going to be a really good peak season this year.”
The Transpacific Stabilization Agreement, the discussion agreement among 15 carriers in the Asia-to-U.S. trade, has recommended an Aug. 1 peak-season surcharge of $400 per FEU as a guideline, but Dekker is skeptical of carriers’ ability to get the full amount. “If they market it as a peak-season surcharge, there are no signals from any source that the demand is there.”
In another move that has increased trans-Pacific capacity, carriers have been replacing some services from Asia to the U.S. East Coast via the Panama Canal using 5,000-TEU-class vessels with 8,000-TEU and larger post-Panamax vessels that travel via the Suez Canal. They want to replace smaller vessels with as large ships as possible in order to reduce slot costs. “Gradually we are seeing all the carriers cascade vessels over to the Suez route,” Jensen said.
With these increases in capacity on the trans-Pacific, carriers won’t be able to escape the pattern of rate erosions after every GRI unless they take stronger measures to limit capacity. “They can hardline it but how long can they hardline a GRI in a market where the fundamentals are weak and the capacity is strong?” Dekker said.
Trans-Pacific carriers increased capacity on their scheduled eastbound services by 13 percent between April 1 and July 1, bringing the year-over-year increase to 6 percent, according to Drewry data. “In theory, that’s not unnatural because we’re coming into the peak season, but in fact the trade is not growing,” Dekker said. “The inference is that there’s going to be excess capacity in the trade.”
Carriers entered the year with the avowed intention of limiting global capacity by scrapping, slow-steaming and idling some ships. They are scrapping small ships, but they have fallen short on the other measures.
“There’s not too much happening on the slow-steaming front, and idling has gone down,” Dekker said. “Idling has gone down to 3 percent of the fleet, which is a bit counter-cyclical because we have weak demand and weak fundamentals.”
Contact Peter Leach at firstname.lastname@example.org and follow him at twitter.com/petertleach.