08/21/2018

On the Horizon: A Challenging Peak Season

Middle of Ocean

Guest Post: Zach Brown, Managing Director – Asia

Forty-foot container rates have skyrocketed 75 percent to United States West Coat (USWC) and 40 percent to United States East Coast (USEC) compared to early July.1 Fixed rates agreed to and signed during the traditional time period of May are being rolled by ocean carriers, as they look to capitalize on the open market.

This year, there are several factors contributing to what has quickly become, and will continue to be, the most challenging and costly peak season in years.

Alliances

In April 2017, we saw the formation and launch of three major shipping alliances: 2M Alliance, Ocean Alliance, and The Alliance. We are now in the first full season under the new alliance structures, and can see a level of discipline by carriers across all alliances that has not been seen in recent years. This is the discipline to avoid getting into price wars with their competitors, to not judge their own success on how full their ships are, and finally, to no longer live by an idea best represented in the 1928 words of Author John A Shedd that “A ship in harbor is safe, but that is not what ships are built for.”  In late May of this year, Maersk released Q1 earning far below estimates, which was a sign to all carriers that something had to change. Today, ships are currently sitting safe in harbors, and carriers are quite happy with them staying there for the moment.

USA / China Tariffs

With the first set of tariffs being implemented in late August and longer lists being ushered through procedural steps, importers are placing orders early in a race to import as much as possible amid uncertainty as to if and when additional tariffs could be imposed on their products. Throughput at major US ports is up nearly 5 percent year-over-year and continues to trend upwards.2 Ocean carriers continue to leverage the surge in demand as further justification for increased market rates.

Fuel

Global Bunker Fuel prices per ton have continued to rise. June 2018 prices averaged around $680/ton, while prices averaged around $480/ton during this time last year. What does that translate to in reality? An average modern vessel with 7,750 TEU capacity will use about 215 tons/day in the course of a journey. Based on a 28-day journey with a $200/ton cost difference today versus one year ago, that translates into a (217 tons/day) X ($200 difference) X (28 days) = $1,215,200 increase in operating costs for carriers. In early July, carriers began to discuss and implement emergency surcharges to address the increases.3 They had success implementing the fuel surcharge, and some carriers continue to charge it on top of fixed and spot market rates.

Blank Sailings / Space

Carriers started to announce blank sailings in late June leading into peak. Carriers will often remove certain services from the market for periods of time to keep costs down, capacity tight, and in turn rates up. Nine carriers across the three alliances have announced blank sailings for 13 vessels. The effects result in an average nine percent capacity reduction per carrier and 3.5 percent across the industry.4 Specific to Take Profit (TP) trade, several carriers in the Ocean Alliance and The Alliance have stated they will reduce capacity to the United States West Coast (USWC) over the next three months, which not only affects those specific lanes, but surrounding origins, as shippers look for additional capacity nearby.

What importers see at the moment is likely to last at least through September, is that their fixed rates and a modest Professional Service Schedule (PSS) will not get them the space needed. The offer from carriers to Beneficial Cargo Owners (BCOs) and Non-Vessel Operating Common Carriers (NVOCCs) alike, is to pay a PSS much higher than anticipated, to book with some ratio of fixed to market rates, to only buy space on the open market, or to let their cargo roll until the tide turns.

zach brown of NFI

Zach Brown, Managing Director, Asia

Residing in Hong Kong, Zach oversees partnerships and relationships in the Asian marketplace to optimize international supply chains for NFI’s customers.

 

Sources

  1. http://www.transportweekly.com/pages/en/news/articles/144895/
  2. http://www.transportweekly.com/pages/en/news/articles/144804/
  3. https://www.drewry.co.uk/maritime-research-opinion-browser/maritime-research-opinions/what-is-driving-uncharacteristic-summer-rally-of-lng-spot-charter-rates
  4. https://www.joc.com/maritime-news/container-lines/trans-pac-spot-rates-rise-again-amid-third-service-cut_20180713.html