Muted rate rise on the TransPac

News 2 Mar 2017 by WCN Editorial

Container freight rates on the key Asia to US West Coast trades do not look likely to increase as much as carriers had hoped.

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A record attendance of over 2,300 delegates to this year’s Trans Pacific Maritime (TPM) conference in Long Beach highlighted that BCO interest in container shipping has never been higher. Hanjin’s bankruptcy clearly rocked US cargo owners not just because of the financial implications, but because it shone a spotlight on the real risks, and the actual complexity of the container shipping business.

As one shipper explained to WorldCargo News, when Hanjin folded his company was being asked for money from people it didn’t know it even had a business relationship with to get its cargo back. The whole incident underlined the complexity of the shipping business, and the real cost of a major supply chain failure.

In the months after the Hanjin debacle shippers and BCO’s heard that 2017 would be a year of adjustment, and they should be prepared to pay higher annual rates this year, less they want to see another carrier failure.

Rates on the spot market also pointed to an increase in annual rates, and heightened carrier expectations ahead of this year’s annual contract negotiations. Going into TPM, SeaIntel’s Sunday Spotlight for the week ending February 19 noted contract rates on the trans pacific would need to rise 37% “to bring the rate levels back in line with the historical links”. With the three new alliances scheduled to start in April it was expected that carriers would be in a position to drive more disciplined behaviour on rates. However, as TPM progressed it started to seem more like another year of business as usual for the carriers.

On the first day of the conference Tan Hua Joo, Executive Consultant at Alphaliner said spot rates over February had been lower than carriers expected, and there was no sign of any undersupply issues to drive upward pressure.

The extent to which the new alliances will be able to drive rates up has also been overstated. From April they will control just over 80% of capacity on the FE-WCNA, with the rest being deployed by six lines on eight weekly sailings (HMM, ZIM, PIL, Wan Hai, Matson and the new SM line being formed from the ashes of Hanjin). Capacity on the trade had increased 5.4% compared to February 2017, and by 4.9% on slots for the peak season period – ahead of growth forecasts for demand.

The message was that Hanjin’s exit has not changed the structural oversupply on the trans pacific, and therefore it is up to “carrier behaviour” to drive pricing up. On this Tan Hoo Joo was diplomatic, but not overly optimistic. He doubted carriers will achieve significant increases, and that noted that the new SM Line will have little option but to price its way in. “They will discount to fill ships, and even if they get 2% (of volume) it will drop prices” he said.

The analyst also noted that the three Japanese carriers have given themselves 18 months to complete their merger and now have an incentive to price aggressively to lift their relative share as they jockey for influence going into a new structure.

The mood also appeared to have swung on the risks of another carrier failure; carrier executives continued to emphasise that it could happen again, but analysts (and former carrier executives in particular) sent out a message that the probability of another failure is actually very low. At the same time carriers are trying to reassure shippers and BCOs that in the event of an alliance partner failure plans are in place to prevent another Hanjin debacle.

Taking an industry snapshot at TPM it seemed it was the shippers who were gaining confidence in their bargaining position. Asked to comment on his rate expectations in a one-on-one interview with Peter Tirshwell, Senior Director, Content, Maritime & Trade IHS Markit, CMA-CGM head Rodolphe Saade declined to give details but said light heartedly that rates “have to have four digits”, implying some shippers are coming to table trying for three.

Saade also emphasised that what happens on the trans pacific is only part of the picture, as CMA-CGM has customers that operate on multiple trade lanes and, in some cases, on multi-year contracts. If the rate is low one year “we expect to see it up the next” he added.