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Spot container freight rates between Asia and Europe are on track to lose all the gains from this month’s general rate increases (GRIs), putting more pressure on annual contract negotiations.
According to container derivatives broker FIS, 2016 Asia-North Europe contract rates, now being discussed, are in the region of just $350 per teu – a massive reduction on 2015 contract rates, although many of these were discounted in the second half of this year by carriers desperate to hold onto cargo.
FIS said the $265 per teu drop in spot rates in the Shanghai-North Europe component of Shanghai Containerized Freight Index (SCFI) this week, to $409 per teu, was the largest-ever fall in percentage terms, at just under 40%.
The broker said spot rates on the trade had declined by more than $150 in a single week on 10 occasions already this year, yet more evidence of the extreme rate volatility due to weakening demand and overcapacity.
Since the SCFI’s 2009 inception, falls of this magnitude have only occurred four times before this year.
“Such large weekly rate declines have been exacerbated by forwarders providing quotes to shippers that have yet to be secured with a carrier, resulting in an added requirement to force the market down to meet the pre-arranged unsecured rate,” said FIS.
Nevertheless, some carriers, including Maersk Line, have indicated that they will not close on 12-month contracts at such a low base, preferring either shorter-term contracts or the spot market.
Traditionally, spot cargo was regarded as a top-up to contracted cargo when volumes were down and represented, at most, only 25% of a vessel’s utilisation. But in the past year these figures have changed dramatically. One carrier told The Loadstar that on some voyages to North Europe in September, spot cargo bookings were accounting for over 50% of the containers loaded.
With the prognosis for annual contract rates so bleak, carriers could decide to walk away from the negotiations and to continue their strategy of monthly GRIs, underpinned by voyage cancellations, to drive spot rates higher.
And shippers could find themselves unable to fix their business on a contract basis unless they are prepared to pay significantly more than the ‘market rate’ to their carriers.
Larger shippers that need continuity will face a difficult decision: agree to contract proposals from carriers and risk being criticised internally for paying over the odds; or take their chances on the spot market and run the risk of having cargo rolled over if the supply-demand ratio tips back the other way next year.
New GRIs have been announced by carriers for December 1. Hapag-Lloyd wants $650 per teu on Asia to North Europe and the Mediterranean; K Line will hike rates by $1,000; and CMA CGM by $950 per teu to the Mediterranean.