Lines in strong position ahead of transpacific contract negotiations

Date: Friday, December 28, 2018
Source: Lloyd's Loading List

Liner efforts to retain the same buoyancy in transpacific eastbound spot freight rates in the early months of 2019, ahead of second quarter annual contract negotiations with shippers, should succeed given improved market fundamentals now compared to a year ago, according to analysts.

As reported in Lloyd’s Loading List, lines are seeking to avoid the second quarter slump in spot rates on the trade seen in 2018 which Maersk claimed led to a “very disappointing contracting season” for lines, and ultimately resulted in service cuts and disappointments for shippers when volumes soared through the peak season.

The joker in the pack for both lines and shippers as they plan for 2019 is the front-loading of Chinese imports by US shippers during 2018 ahead of expected tariff increases on many Chinese exports from 10% to 25%. The hikes were due to be implemented on 1 January but even though they have been stayed for 90 days as part of a US-China trade truce, large amounts of cargo were shipped before the deal was brokered.

Further complicating matters is the nature of US trade policy formulation – some believe the 90-day trade truce might be cancelled on a twitter whim by President Trump, others that it might be extended.

Yet analysts believe market fundamentals on the trade generally still favour lines, at least compared to a year ago.

“Even if there is a demand lull in early-2019 caused by the late-2018 expedited cargoes, which we think is quite likely, carriers are starting off from a much stronger position than they were for the 2018/19 contract season”, Simon Heaney, container research manager at shipping consultant Drewry, told Lloyd’s Loading List.

“Eastbound spot rates are currently around double what they were at this point last year and should remain above the year-prior position come contract negotiation time, assuming the tariff truce holds.

“If hostilities resume and there is another rush to beat a new deadline then rates will strengthen”.

Eytan Buchman, VP of Marketing at Freightos, also questioned whether the 90-day transpacific truce would last with trade tensions between China and the US currently ratcheting up rather than down.

“The 90-day China-US trade war truce has likely fuelled dropping rates”, he said. “But cracks are already appearing. This week, China moved closer to requesting a formal WTO inquiry on whether US’s trade tariffs contravene international trade rules.

“Post-holiday, pre-Golden Week seasonality typically pushes rates higher - a trade war renewal will likely do the same”.

Lines were forced to cancel mid-December General Rate Increases and China-US West Coast and China–US East Coast pricing fell 10% and 13% this week compared to last, according to Freightos.

In the coming weeks, most analysts expect a bump in demand ahead of factory closures for Chinese New Year (CNY) starting 5 February to give the China-US fronthaul market a lift in January. However, as things stand, the 2019 post-CNY seasonal slump is forecast to be pronounced.

As Freightos noted, although transpacific ocean freight prices have eased recently, they are still well more than double the price of this time last year and should hold through January as importers - many of whom are currently over-stocked - replenish after the Christmas sales.

BIMCO's chief shipping analyst Peter Sand said in the coming weeks the eastbound transpacific market would likely see “some weakness beyond seasonality” due to frontloading bringing forward US retailer demand and hurting volumes.

However, he said the fundamental balance in the market was always decisive for setting spot freight rates and contracts and, as such, lines were better placed than a year ago despite 2018 seeing a ten-year low in vessel demolitions.

“Looking ahead to 2019, fleet growth takes centre stage when it comes to market fundamentals,” he said in a note. “If only judged by new-builds, it’s clearly positive. But remember, 700,000 teu are idle in today’s market. If the lion’s share of that is reactivated – which it will be as soon freight rates just go up slightly – expectations may be reversed”.

Hopes for a rise in demand were, Sand argued, clouded by the ongoing trade war and disappointing GDP growth in many advanced economies.

“Volume growth on long-distance trades will be more critical than ever, as fleet growth is focused to fit into them”, he added. “Intra-Asian trades will also suffer if the front-haul, transpacific cargo flow stays dented because of tariff walls on either side of the Pacific”.

Freightos said that for lines, the recent dips in pricing on the critical eastbound transpacific would not affect short-term carrier profitability because crude oil prices had “taken a dive over the last three months”.

But, it added, such volatile oil prices “will not work in their favour in upcoming contract negotiations”.

According to Drewry's Heaney, with so many variables in play, from a liner perspective, balancing supply and demand satisfactorily next year will be difficult, but not impossible.

“In such an unpredictable market it is challenging for carriers to adequately match supply with demand,” he said. “But to their credit carriers did a good job in the transpacific this year and I see no reason why they won’t be able to repeat the feat next year regardless of the conditions facing them”.


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