Supply-demand gap on Asia-Europe trade widens

Supply-demand gap on Asia-Europe trade widens

Rotterdam port.

The injection of vessels comes as demand growth of Asia-Europe westbound volume slows. (Above: Rotterdam port.) Photo credit: Shutterstock.com.

Shippers will be able to use widening supply-demand imbalance this spring to capitalize on the spot market and fend off surcharge efforts, adding salt to carriers' inability to make significant pricing gains in 12-month contracts.

According to Alphaliner, deliveries of mega-ships to carriers in the Ocean and THE alliances this year will add up to 28,000 TEU weekly to the Asia-North Europe trade, which represents a 10 percent increase in capacity on the route. The injection of vessels comes as demand growth of Asia-Europe westbound volume slows, with the growth rate from January through November 2018 up just 1.2 percent year over year. 

Shippers are sympathetic with the predicament of carriers facing $11 billion to $15 billion in additional low-sulfur fuel costs every year when the cleaner fuel rule is imposed from Jan. 1, 2020, but only up to a point, and have told JOC.com they will use overcapacity as a tool to fend off surcharges they feel are excessive or unwarranted.   

The supply chain manager of a Europe-based importer said the annual ocean contracts had just closed and the new allocations and rates would begin on Feb. 1.

“This year we had to revise a bit the structure of our rates because of the IMO [International Maritime Organization] 2020 low-sulfur rule and we told carriers we are open to discussing additional surcharges within the contract year. But seeing the overcapacity, I am now inclined to decline any surcharge,” the supply chain manager said.

Logistics director happy with mid-year start

The Europe-based logistics director for a global retailer said he was beginning to tender now for annual contracts beginning on June 1, later than the company’s usual position, but he was happy with the mid-year start.

“The excess capacity will be my main negotiation leverage over the crazy appetite of carrier to surf on the IMO 2020 low-sulfur wave, mixing everything together to catch shippers that are asleep,” he told JOC.com.

Shippers on the Asia-Europe trade generally start their annual contracts with carriers at any time from December to June. Those finalizing or in the process of negotiating new contracts told JOC.com that slowing volume and surplus capacity enabled them to keep the deals at the same level or even below those of 2018, although a slightly higher bunker adjustment factor (BAF) than last year had been agreed on.

A European clothing retailer that has finished the first round of its tender process said he was seeing a decrease year over year in contract levels of 5 percent to 10 percent on average.

But as carriers prepare for the significantly higher low-sulfur fuel costs from the fourth quarter, the excess capacity and declining demand growth is coming at a particularly bad time. Carriers estimate the IMO 2020 low-sulfur fuel requirement from Jan. 1 will add that aforementioned $11 billion to $15 billion to their annual bunker bill, and they have no option but to recover the costs from customers, via a revised low-sulfur BAF.

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