Eastbound trans-Pacific spot rate rally ends ahead of GRIs

Eastbound trans-Pacific spot rate rally ends ahead of GRIs

“Importers have been front-loading trans-Pacific shipments to beat Jan. 1’s tariff increase, but then what happens to demand?” said Zvi Schreiber, Freightos CEO. (Above: The Port of Los Angeles.) Photo credit: Shutterstock.com.

Spot rates from mainland China to the US West Coast declined sharply this week, ending a rally that began in late August and suggesting that the front-loading ahead of Jan. 1 tariff increases might be moderating. 

The drop in the spot market comes a week before carriers are set to impose Dec. 1 general rate increases (GRIs) on the trans-Pacific trade. A mid-December GRI has also been announced.

Shanghai-US West Coast rates lost $282, falling 11 percent to $2,247 per FEU, a rate the trade has not seen in three months. Spot rates from mainland China to the US East Coast slid by $87 to $3,652 per FEU.

Shipments in the past three weeks have been mostly spring merchandise and manufacturing inputs front-loaded ahead of the Jan. 1 tariffs, so it is uncertain how long the volume will remain high and vessel space tight. A forwarder predicted that imports will drop noticeably beginning in mid-December, while a carrier executive said imports would remain strong right up to the Jan. 1 deadline. Either scenario begs the question as to what will happen in January. 

According to Maersk Line chief commercial officer Vincent Clerc, volume is expected to fall off in the first quarter of 2019.

“As tariffs start to come into effect in January, we expect to see a significant slowdown in demand of imports into the US,” Clerc said during the Maersk Line third-quarter earnings call.

“A lot of customers have accelerated their purchase orders to get them into the US before the tariffs, but there will be a lull as everyone tries to figure out their supply chains going forward. So we have here an assignable cause for lower demand, and the way we are dealing with it on the Pacific is that we will take capacity out around Chinese New Year to make sure we right-size our network for lower demand.”

Supply, demand forecast

Zvi Schreiber, CEO of Freightos, predicted that supply-demand would remain in balance through December, so previously announced GRIs to take effect on Dec. 1 and Dec. 15 will most likely not be enforced.

Carriers have been active in raising supply with extra loaders on the West Coast routes, which may be influencing pricing on the trade, but shippers have until the middle of December to get their cargo loaded in Asia in time to reach the US before Jan. 1. East Coast shippers are under greater time pressure and will need to load their containers in Chinese ports by the first week of December.

But overall, the front-loading of Christmas merchandise that began in mid-summer, followed by the early rush of spring shipments due to tariffs and threatened tariffs, will ensure that container volumes this year will be rather strong. Imports in the first nine months of 2018 were up 5.2 percent over the same period last year, according to PIERS, a JOC.com sister product.

The ability of carriers individually and through their vessel-sharing alliances (VSAs) since summer to balance supply with demand has kept spot rates high for the past four months. Carriers suspended three weekly services to the West Coast, reducing capacity by 6 percent, and one to the East Coast, reducing capacity 1.3 percent. Also, carriers this autumn have blanked individual sailings to maintain balance as well as blanked voyages. These moves kept West Coast spot rates above $2,000 per FEU for 16 consecutive weeks and East Coast rates above $3,000 for 17 weeks.

A total of 26 sailings were blanked on the trans-Pacific, almost double the combined number of the last two years, according to SeaIntelligence data, pushing up rates to five-year highs.

The tightened space creates disruption for shippers, something that was especially evident on the trans-Pacific this peak season and beyond with shipper complaints of rolled cargo and a lack of space for even contracted volume.

At the JOC’s TPM Asia conference in Shenzhen in October, shippers questioned why capacity was withdrawn ahead of a peak shipping period with trade tariffs in the offing.

Asked whether this was a cynical move by the carriers, APL CEO Nicolas Sartini told JOC.com, “You have to look at the way it was back in May-June. It was when we had a very steep increase in fuel starting and it was after the conclusion of the contracts that had ended with disappointing rates. It was not orchestrated and it was not easy to focus on the exact demand, so it was a logical decision back then.

“So if you looked at the economics in May-June, it did not make sense to maintain capacity. Other alliances made their same assessment and also withdrew capacity.”

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