With spot rates in the eastbound Pacific already dropping, pressure is building on carriers to blank more sailings around Golden Week. The dry docking of ships for scrubber installation in line with the global low-sulfur fuel mandate that takes effect Jan. 1, 2020, gives carriers a natural avenue to do so.
Carriers this year face increased pressure to manage capacity because import volumes are softening due to the United States-China trade war. As a result, spot rates last week to the West Coast were down 28.7 percent from Week 33 last year, while East Coast rates were down 14.2 percent, according to the Shanghai Containerized Freight Index (SCFI), which is published under the JOC.com Shipping & Logistics Pricing Hub. Carriers may have to take strong measures, such as canceling additional sailings, to stem further rate declines.
During Golden Week in China, which this year is Oct. 2-7, many factories close and US containerized imports drop substantially. Carriers each year respond by canceling sailings, not only for Golden Week, but also during the several ensuing weeks.
Carriers so far have announced eight blanked sailings to the West Coast for the month of October, equating to a 5.4 percent capacity reduction in the trade lane. In the same four-week period last year, carriers reduced capacity by 4.4 percent, according to Sea-Intelligence Maritime Consulting. The average capacity reduction in the four-week Golden Week periods in 2014-18 was 7.6 percent.
Carriers so far have announced only two blank sailings to the East Coast, both scheduled to take place in the week following Golden Week, said Alan Murphy, CEO and co-founder of Sea-Intelligence. That amounts to a 10.6 percent capacity reduction for the week of Oct. 7-12. To match the total capacity reduction during the four-week period last year, carriers would have to blank the equivalent of another 3.6 average-size sailings. To match the 2014-18 average, 4.9 average-size vessel sailings would have to be blanked, Murphy said.
The five-year comparisons by themselves indicate carriers still have plenty of leeway to cancel more sailings in October, but the impact of the year-long US-China trade war on imports could force even greater capacity reductions. In the first seven months of 2019, total containerized imports from Asia increased 2.1 percent from last year, but US imports from China declined 4.4 percent, according to PIERS, a JOC.com sister company within IHS Markit. Additional 10 percent tariffs on some imports not already under tariff are scheduled to take effect Sept. 1.
The scrubber factor
Implementation of the International Maritime Organization’s (IMO's) global low-sulfur fuel requirement could give carriers a way to blank sailings while also preparing vessels for compliance. Carriers are installing scrubbers on some vessels to achieve the sulfur reduction while still burning high-sulfur fuel; a vessel must be removed from service for about three weeks for installation. The majority of vessels in the trans-Pacific trades will not have scrubbers but will burn fuel with a sulfur content of not more than 0.5 percent. That process involves dry docking a ship for about a week to flush the high-sulfur fuel out of the tanks. The share of vessels on Asia-US trade with scrubbers or set to have scrubbers isn't known, but IHS Markit expects about 6 percent of container ships globally to have the equipment installed to meet the IMO mandate.
Carriers in either scenario have two options. They can replace a vessel that is removed from deployment with another vessel from their fleet, which has a minimal impact on capacity in the trade lane. Alternatively, they can choose not to replace the vessel, which equates to a blanked sailing. Those decisions will be made on a carrier-by-carrier or alliance-by-alliance basis.
Larry Burns, senior vice president of trades and sales at Hyundai America Shipping Agency, said HMM has some scrubber installations planned for this fall, and other vessels will be dry-docked to transition to low-sulfur fuel. However, HMM, like most carriers, is still deciding whether to deploy substitute vessels or to blank the sailings. “It could depend on supply and demand,” Burns said.
Jon Monroe, a consultant, said carriers so far have told customers little about their plans for dealing with the IMO 2020 requirements, but rather they are focusing on what they consider a more pressing development — the recent decline in spot rates. Capacity decisions for the Golden Week period will be based mostly on the direction of freight rates, Monroe said.
Spot rates in some lanes, especially to the West Coast, have dropped below the fixed, or service contract rate, said Monroe.
“It’s a crazy month,” he said, adding that for non-vessel operating common carriers (NVOs), the strategy is to sell freight all-kind (FAK) rates, which in many cases are below the fixed rates today.
The spot rate of $1,474 per FEU to the West Coast last week was down 7.2 percent from the previous week. The West Coast spot rate this summer peaked at $1,720, so it has declined 14.3 percent since June 28.
The East Coast rate of $2,660 per FEU last week was down 5 percent and is down 8 percent from the summer peak of $2,891 on July 19, according to the SCFI. If spot rates continue to decline in the busiest time of the year, carriers may decide their best strategy is to blank additional sailings during Golden Week and beyond.
Blanked sailings spread out over four weeks
In past Golden Week periods, carriers have altered their capacity reductions from week to week, and that is apparently the strategy they are implementing this year. Sea-Intelligence stated that West Coast blank sailings announced so far will reduce capacity 6.3 percent in the week following Golden Week, 12.2 percent in the following week, and 2.8 percent in the third week after Golden Week.
The two blanked sailings to the East Coast are scheduled for the week following Golden Week, which will reduce capacity by 10.6 percent that week. In past years, carriers also blanked sailings to the East Coast in the second week after Golden Week, so additional blanked sailings to the East Coast could be in the offing, Murphy said.
The slower decline of East Coast spot rates indicates ships on all-water services to the East Coast are achieving higher utilization rates. Total capacity deployed to the West Coast, about 1.17 million TEU, is almost twice the capacity of 650,800 TEU to the East Coast, according to Sea-Intelligence. Also, ships fill up faster to the East Coast earlier in the peak season with lower-value merchandise that can tolerate the inventory carrying costs and therefore benefit from the cheaper all-inclusive cost on the all-water services.
West Coast services tend to fill up later in the peak season with higher-value merchandise that is more sensitive to inventory carrying costs, but can better tolerate the higher all-in freight rate of the ocean voyage plus the intermodal rail costs from West Coast ports to the US interior.
As carriers begin to publish their floating bunker fuel surcharges in the coming months, they must decide how to price the costlier low-sulfur fuel in an environment where the base freight rates could still be under downward pressure. Since March, carriers have stated they intend to pass along most, if not all, of their increased costs associated with the low-sulfur fuel.
Still, carriers want to avoid getting entangled in a war of undercutting each other on bunker fuel surcharges. To achieve that goal and set a precedent going forward, they could stick firmly with the floating fuel charges they post but lower the base freight rate charge for FAK shipments or other cargo not moving under service contract rates.