Eastbound trans-Pacific spot rates broke through the psychological barrier of more than $2,000 per FEU to the West Coast and $3,000 to the East Coast, amid reports of carriers rolling contracted cargo as the temptation for higher priced spot freight heightens.
Rates haven’t been this high since February 2017. Spot rates in the eastbound Pacific this week increased 8.9 percent to $3,099 per FEU to the East Coast, and 10.5 percent to $2,074 to the West Coast, according to the latest reading of the Shanghai Containerized Freight Index (SCFI), as displayed on the JOC Shipping & Logistics Pricing Hub.
Strong US import volume early — a harbinger?
The increases in what is considered the first week of the peak shipping season are attributed to strong US import volumes, capacity reductions being implemented by carriers, and reports of shipments missing the intended voyages (cargo rolling) in Asia. Carrier executives expect this scenario to continue well into August-October. Two shippers told JOC.com that their shipments were rolled in Asia.
The beginning of missed shipments this early in the peak season indicates volumes are building faster than usual. “I’m bullish,” said Lawrence Burns, senior vice president of trade and sales at Hyundai America Shipping Agency. Rolling of cargo at Asian ports began in late July, and is expected to spread throughout the trade. “Everyday we’re being called by shippers unable to find space,” Burns said.
Ocean carriers need a strong peak season if they are to avoid losses this year. The annual service contracts they signed effective May 1 were disappointing, settling in about $1,100-1,200 per FEU to the West Coast for all but the largest customers (which paid even less) and $2,100-2,200 per FEU to the East Coast. Those rates were down about $100 per FEU from the 2017-2018 contract rates. Carriers had begun the year signaling they were looking for rate increases this year in their service contract negotiations.
This is an atypical year in the Pacific trades. Some importers are fast-forwarding shipments to get ahead of Trump administration tariffs, which inflated eastbound volumes in June and July. At the same time, carrier alliances announced the suspension of three weekly services to the West Coast, for a total capacity reduction of about 6 percent, effective July-August. The 2M Alliance plus Zim Integrated Shipping Services announced the suspension of one weekly service to the East Coast, effective in September, for a 1.3 percent capacity reduction in that lane.
Also, carriers have implemented “emergency” bunker fuel surcharges on beneficial cargo owners other than their steady customers of about $55-60 per TEU and those charges are reflected in the steady increase in spot rates that have taken place since early July. Overall bunker prices that are passed on in the spot rates are up by more than 50 percent year over year. Finally, the cost of inland transportation is increasing because of a truck capacity shortage that has been developing since April.
Last time, similar pattern, different cause
The last time the eastbound Pacific experienced a sudden and steady increase in spot rates was in the autumn of 2016 following the August 31 Hanjin Shipping bankruptcy. Spot rates were jolted by the immediate loss of about 6 percent of capacity in the trade during the peak season. The spot rates spiked again in February 2017 as the trade was adjusting to the loss of Hanjin and at the same time struggling to handle pre-Chinese New Year shipments.
Spot rates began a steady decline in the spring of 2017, and that decline continued for the rest of the year into early 2018. Since then, however, US imports have been increasing, and year-over-year spot rate comparisons with 2017 have been increasing. This week, the East Coast rate was up 16.5 percent from Week 31 in 2017, and the West Coast rate was 24.9 percent higher.
In fact, the US import trade has been outperforming the major east-west trade lanes this summer, according to the Freightos Baltic Indexes. “Of the major lanes, year on year, China-US West Coast, currently 23 percent up, is faring best. In fact, with one exception, both the West Coast and East Coast indexes have been up, year on year, for seven straight weeks,” said Zvi Schreiber, Freightos CEO. Schreiber’s comments from last week were made before Friday’s posting of the SCFI spot rate increases.
Carriers appear poised to attempt further spot rate hikes in September. Evergreen Marine Corp., in an advisory to customers, announced a $1,000 per FEU rate hike effective in September.
The same story is unfolding on the land side. XPO Logistics this week said it expects a “big peak” ahead. Bradley S. Jacobs, chairman and CEO, said the strong US economy, with GDP growing 4.1 percent in the second quarter, has spurred the trucking and logistics provider to expand its warehouse space by 21 million square feet and increase employment by 4,000 this year. In fact, growth in the August-November period has been accelerating in recent years, increasing 2 percent in 2015 year over year, 3.8 percent in 2016, and 6 percent in 2017.
Contact Bill Mongelluzzo at email@example.com and follow him on Twitter: @billmongelluzzo.