News / Slack season overcapacity could prove costly to carriers in contract talks

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Unless carriers seriously commit to reducing capacity as the major east-west trades enter the slack shipping season, they could see significantly reduced annual contract rates in 2018.

Drewry Maritime Research today warned the industry that its failure to draw up plans to withdraw services, or even announce void sailings, over the fourth quarter of this year and the first of next, would likely continue to depress rate levels – despite last week’s rally.

It said: “Lines have, for some unapparent reason, suddenly eschewed some of their normal modus operandi. In particular, there has been a complete lack of service suspension announcements.

“That would be understandable if demand and freight rates were strong, but that isn’t the case as spot prices on the east-west trading routes have been on a downwards spiral for a number of months.

“This situation is most significant in the Asia-Europe corridor where annual contract negotiations are already underway. Every weekly deflation to spot rates further weakens carriers’ negotiating position,” Drewry said.

In spite of the recent rate weakness, load factors and vessel utilisation levels have been counter-intuitively strong for the best part of the year, which Drewry suggested may be one reason why carriers have been reluctant to pull services.

“If that is the thought process, that would miss the point,” said Drewry.

“They have increased their exposure to the risk of locking into much lower prices for next year than they might have got, had they temporarily removed some capacity,” it added.

Over the past decade there has only been one instance of carriers not withdrawing capacity on the Asia-Europe trades during the slack season, but Drewry has forecasted a 1% increase between now and January.

“It does appear from the outside that lines have preferred to win customer loyalty to their alliance through consistent and reliable services at the expense of adjusting capacity to support flagging rates.

“If so, that could be a decision that comes back to haunt them when the ink is dry on 2018 contracts,” it added.