Capacity cuts hold up Asia-Europe rates

Capacity cuts hold up Asia-Europe rates

Aggressive capacity cuts on the Asia-Europe trade is paying off for the carriers. Photo credit: Shutterstock.com.

The blank sailing strategy by carriers continues to prop up pricing levels on Asia-North Europe routes, with the spot rate actually rising $29 per TEU as capacity withdrawn from the trade this week reaches its highest level ever.

Carriers have been aggressively cutting capacity through May and June to prevent a rate slide as consumer demand disappears amid Europe-wide lockdowns to combat the coronavirus disease 2019 (COVID-19) that have closed most retail outlets.

Sea-Intelligence Maritime Consulting expects at least 35 percent of the available capacity on Asia-Europe to be blanked over the next three weeks, while maritime academic Theo Notteboom said the withdrawn capacity this week could be as high as 38 percent.

It is so far proving to be an effective strategy. Despite blank sailings peaking this week, cutting close to 40 percent of Asia-Europe capacity, the spot rate is —incredibly — 15.2 percent higher than during the same week last year. Rates from Shanghai to North Europe increased almost 4 percent to $753 per TEU in the past week, according to the latest reading of the weekly Shanghai Shipping Exchange’s Shanghai Containerized Freight Index (SCFI).

The spot rate has defied even the collapsing fuel price. Since March, the average price of low-sulfur fuel has fallen 52 percent to $203 per ton, and the price of high-sulfur fuel has halved to $143 per ton, according to data from the Oil Price Information Service (OPIS), a sister product of JOC.com within IHS Markit. Yet in the last seven weeks, the Asia-North Europe spot rate has only fallen $51 per TEU, according to the JOC Shipping & Logistics Pricing Hub.

Rates tested by weak market

The question is how long a rate slide can be held off by blank sailings, something that will be determined only when demand returns to Europe. Countries across the continent have already begun taking progressive steps to come out of the continent-wide lockdowns, with Kuehne + Nagel CEO Detlef Trefzger predicting the recovery will begin in June.

“What we need is a release of all the curfews and lockdowns, but that’s a government decision, not an economic or a business decision,” Trefzger said in a first quarter earnings call Monday. “And then we need people that have enough money to spend to consume again.” 

“For the third quarter, we will see growth again,” he added. “I would not say it will be a V-shape. I don’t know what shape it will look like. But it will also not be a U, as some people have speculated. It will be a gradual improvement, and we are ready for that.”

Drewry Maritime Research was also cautious about predicting any recovery in the container shipping market that it believes will remain volatile through 2020.

“Ocean carriers’ finely tuned skills in the art of capacity management are going to be sorely tested in the coming months,” the analyst wrote in a recent market insight. “It is their daunting task to judge how much container ship capacity is needed during the demand pullback, and also to be ready to service the market when the recovery begins, whenever that may be.”

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.