Extra-loaders keep lid on eastbound trans-Pacific spot rates

Extra-loaders keep lid on eastbound trans-Pacific spot rates

Port of Los Angeles.

“The extra-loaders for sure are taking pressure off the market,” said Ernie Kuo, senior vice president, Pacific International Lines, USA Agency Services. “My understanding is they are full,” he said Friday. (Above: The Port of Los Angeles.) Photo credit: Shutterstock.com.

Spot rates on US imports from Asia remain in a narrow range as extra-loader voyages that ocean carriers have entered in the eastbound Pacific this month seem to be taking the edge off the supply-demand imbalance after inbound cargo slipped in August.

“The extra-loaders for sure are taking pressure off the market,” said Ernie Kuo, senior vice president, Pacific International Lines, USA Agency Services. “My understanding is they are full,” he said Friday.

Therefore, some importers and non-vessel operating common carriers (NVOCCs) continue to pay a premium on shipments leaving Asia, but the steady escalation of spot rates that took place in July and August due to especially tight capacity has slowed. “Space remains tight, but I anticipate that improving as we approach October and Golden Week. Carriers are still playing around with allocations based on what you are willing to pay,” an NVOCC said Friday.

The spot rate to the East Coast this week was $3,512 per FEU, down 0.2 percent from last week, and the West Coast rate was $2,349, up 0.7 percent, according to the Shanghai Containerized Freight Index (SCFI) published under the JOC Shipping & Logistics Pricing Hub on JOC.com. The spot rate to the West Coast is about 90 percent higher than it was in June, and the East Coast rate is about 60 percent higher.

Carriers add loaders due to an early volume surge

Freight rates and cargo volumes in the eastbound Pacific are unusually volatile this year. July, normally not a peak month, saw the largest volume of imports so far this year. The 2,165,169 TEU were 9.1 percent higher than July 2017 and a 9.7 percent increase over June. That contributed to the decision by carriers to announce extra-loader ships for September. July’s numbers were so out of sync with normal seasonal cargo flow that in August, normally one of the busiest months of the year, imports ended up slightly lower than July at 2,133,770 TEU.  

However, ocean carriers individually and through three vessel-sharing alliances had already announced in early summer they would suspend three weekly services to the West Coast, reducing capacity about 6 percent, and one to the East Coast, reducing weekly capacity about 1.3 percent, as prospects for the peak season were uninspiring this spring.  

Almost at the same time, imports surged because retailers moved shipments forward ahead of the Trump administration’s tariffs on imports from China. Vessels filled up, hundreds of shipments were rolled in Asia each week, spot rates spiked, and in some cases carriers charged a premium on top of the spot rate. High vessel utilization rates, even in the high-90-percents, don’t usually result in rapid spot rate increases. It takes missed voyages in Asia to motivate importers to agree to pay higher spot rates. “Space is currently very tight for China-US shipments, operating on a three- to four-week backlog, and some shipments are getting rolled,” said Zvi Schreiber, CEO of Freightos, which publishes the Freightos Baltic Indexes.

Emergency bunker fuel surcharges also figured into the rates. Oil prices spiked this spring, and in addition to the rate adjustments called for in the floating bunker index that many carriers and their customers have agreed to use, some carriers added an “emergency” charge on top of the bunker fuel surcharge. Therefore, in July, the cost of bunker fuel on the major global exchanges was 51.6 percent higher than July 2017.

Extra-loaders ‘served to blunt the spot rate increases’

However, sensing an opportunity to grab market share in a growing market, carriers such as HMM, CMA CGM, Maersk, and Evergreen announced that in September they would either upsize vessels in existing weekly services or add single-voyage extra-loader ships to fill the growing gap between supply and demand. In addition to injecting immediate capacity into a trade lane, carriers normally do not charge premium rates because they have to immediately fill 5,000 or so slots of capacity that were not anticipated when the sailing schedules were set months ago. “They want them to be as full as possible,” Kuo said. The extra space and lack of premium charges served to blunt the spot-rate increases.

Shippers and carriers expect import volumes to remain strong for the rest of September leading up to Golden Week in China. The Asia-Europe trade, which normally precedes the trans-Pacific in the timing of seasonal rate movements, has been experiencing a decline in spot rates. China-North Europe rates this week declined to the lowest point since mid-May, as listed in the SCFI. That does not mean, though, that trans-Pacific spot rates will plummet after Golden Week. Carriers have already announced about a dozen void sailings beginning in October. A blank or void sailing is the cancellation of a single voyage during a slack period, such as Golden Week when factories slow production or close for the week.

Retailers say imports in the coming months will continue to increase year over year, but at a measured pace. The National Retail Federation’s Global Port Tracker, published each month with Hackett Associates, forecasts import growth of 4.9 percent in October, 2.6 percent in November, and 4 percent in December, year over year.

Chinese New Year in 2019 is Feb. 5, or 11 days earlier than in 2018. That means the normal slack period that follows end of the peak-shipping season in November will be compressed, and retailers in December will begin to  ramp up their imports before factories in Asia close for a couple of weeks beginning Feb. 5.  

Since tariffs, and even just the threat of tariffs between the United States and China, are creating so much uncertainty this year, sudden swings in bookings and spot rates could still occur at least through the remainder of the year. The Trump administration, which has called for an additional $200 billion in tariffs on imports from China, announced Thursday its intention to re-enter talks with Chinese leaders later this month, which could avert the tariffs.

Contact Bill Mongelluzzo at bill.mongelluzzo@ihsmarkit.com and follow him on Twitter: @billmongelluzzo.

Comments

In this case, a rare one, carriers are able to take advantage of the supply/demand ratios and get higher rates in the spot market. Usually they are on the wrong end of that equation. The extra loaders mitigate that somewhat, and if left unchecked, will force the rates back down. It is the balancing act of capacity management decision making that provides the real end results.