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Global Supply Chain News: US Importers Benefitting from a "Cold War" in Container Rates Even as Volumes Improve


Carriers Just Can't Achieve Higher Rates Even as Utilization is on the Rise

Oct.10, 2017
SCDigest Editorial Staff

A rather of phenomenon is occurring is the cost of shipping containers from Asia to the US West Coast – rates are trending down even as volumes and utilization are on the rise.

For a change in 2017, volumes have been relatively strong. The analysts at Drewry estimate that eastbound Asia to the West Coast of North America shipments increased by a healthy 5.7% in the first seven months of 2016, although most of the growth was driven by containers headed to smaller Canadian and Mexican inbound markets.

Supply Chain Digest Says...

The good news for shippers: somehow those market dynamics aren't translating into higher rates for carriers.

What do you say?

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More recent PIERS data covering the US only for August shows that container shipments from Asia to the West Coast have increased by a decent 2.7% through the first eight months of the year.

And it looks like those higher volumes are likely to continue. Back-to-back strong Asia to US imports in July (+6% year over year) and August (+8% year over year) have given the carriers some added momentum and bodes well for the remainder of the year.

The most recent trade statistics for the US, Canada and Mexico suggest that the Asia to North American West Coast trade is on course for annual growth of at least 5%. The 12-month rolling average showed growth of 5.5% as of July, Drewry says.

And with (mostly) capacity discipline over the past year, utilization of containerships has been rising. After dipping to just below 80% in Q1, utilization of container ships moving from Asia to the West Coast has the high 90s percentage range in recent months. Still, due to a reduction in cancelled sailings this year versus 2016, capacity for both September and October will be about 10% higher year-on-year, according to Drewry's analysis.

The good news for shippers: somehow those market dynamics aren't translating into higher rates for carriers.

"It is another oddity of the Asia-WCNA market that spot market freight rates – represented here by Drewry's Hong Kong to Los Angeles benchmark – have trended downwards in the 12 months," Drewry notes, adding that "Carriers are pushing for rate increases, but they are simply not getting any traction. For example, Hong Kong to Los Angeles spot rates fell by $100/40ft container at the start of September when carriers had originally asked for as much as $1,000/40ft." (See chart below).

(See More Below)



Overall, the China Containerized Freight Index has been trending down since the start of 2017, falling by about 7% over that period.

So what is going on?

Drewry suggests that "Carriers' lack of success in raising freight rates when the supply-demand balance has been in their favor implies that a sort of cold rate war is occurring, one where lines avoid heavy discounting but instead are prepared to eschew rate increases to maintain market share as long as rates are profitable."

So importers are benefitting from a rather odd period in the container shipping market. Will it last?
"Carriers should be achieving higher spot rates given the strong fundamentals, but appear content to sacrifice GRIs [general rare increases in exchange for holding market share," Drewry concludes. "The position could well change as the market concentrates."

Are you surprised container rates from Asia have not risen more? Do you expect tha tto change? Let us know your thoughts at the Feedback section below.


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