U.S., China agree any deal must be enforceable
Date: Monday, February 4, 2019
Source: American Shipper
Drewry suggests shippers may want to lock in rates because of rate volatility and join shipper associations or buying groups.
Because of rate volatility, he suggests shippers move “as much of their cargo under contract rates as possible,” perhaps 90 percent under contract and just 10 percent at floating rates.
Spot rates remain much higher than they were one year ago, he notes. Drewry’s World Container Index pegged the rate from Shanghai to Los Angeles at $2,197 for a 40-foot container on Thursday. That was 14 percent higher than it was a week earlier and 52 percent higher than it was a year earlier. Similarly, the rate from Shanghai to New York was $3,380 for a 40-foot container on Thursday, 14 percent higher than a week earlier and 17 percent higher than at the same time in 2018.
Because spot rates are very high, Damas says beneficial cargo owners should expect some inflation when they renew contracts this year, but he adds the increase shouldn’t be anywhere near the current premium in spot rates.
“There is still a huge gap between contract rates and spot rates,” he says.
Damas believes that smaller shippers could realize benefits in joining a shippers association or buying group. Last March, Drewry and the supply chain consultant Chainalytics created the Ocean Buying Group, which brings together the volumes of many small and midsize shippers so that they have enhanced buying power.
The Ocean Buying Group has attracted more than 20 beneficial cargo owners, moving about 100,000 annually containers since it was created.
“We know from all the contracts negotiated late last year, rates have already started to firm up,” says Damas, though he notes only a small number of contracts were negotiated in November and December and the bulk of transpacific contracts will be negotiated in coming months.
He anticipates freight rates in the eastbound transpacific for the 2019-20 contract year will increase about 5 percent year-over--year.
Damas is expecting the average size of ships operating in the transpacific trade to continue to grow in the coming year as carriers take delivery of new, ultra large container carriers (ULCCs) to be operated in the Asia-Europe trade lane and continue their established practice of “cascading” slightly smaller ships operating between Asia and Europe into the transpacific trade.
ULCCs have capacity to carry 18,000 TEUs or more and Drewry says ULCCs with aggregate capacity of 460,000 TEUs of capacity will be delivered this year.
In recent weeks, forwarders like Flexport and MIQ have warned shippers about extreme congestion in ports such as Los Angeles, Long Beach and New York. Damas believes this reflects the rush by shippers to move cargo into the U.S. before tariffs on Chinese goods were slated to increase on Jan. 1 and will likely ease.
But he says “clearly it is better to diversify your risk” and move cargo through multiple ports, referencing the “four corners” strategy that many shippers employ — moving cargo through ports in the Northwest U.S. or British Columbia, Southern California, New York or other Northeast ports and Southeast U.S. ports.
U.S. importers have been moving a greater share of their cargo from the Far East through East and Gulf Coast ports in recent years. An article by economist and international trade adviser Jock O’Connell in the September edition of the West Coast Trade Report newsletterof the Pacific Merchant Shipping Association noted in 2003, U.S. West Coast container ports handled 75.6 percent of the containerized import tonnage from the East Asia that moved through mainland U.S. ports. By 2017, that share had dropped to 60.2 percent and in the first seven months of 2018 amounted to 59 percent.
Damas says that trend might reverse itself if the price of bunker fuel used by containerships rises sharply because of the International Maritime Organization agreement that ships should burn fuel with a sulfur content of no more than 0.5 percent or be equipped with scrubbers that can remove sulfur from engine exhaust. Currently most bunker fuel has a sulfur content of 3.5 percent.
He offered this rough comparison of two services: A 7,600-TEU ship traveling to the U.S. East Coast via the Panama Canal uses about 4,100 tons of fuel in a round-trip voyage, about 70 percent more than the 2,400 tons of fuel used by a vessel string employing a 8,300-TEU ship. Of course, moving cargo across the U.S. by rail or truck uses additional fuel, but if the cost of low-sulfur bunker fuel for ships is much higher, the price advantage of moving cargo to destinations in the East through East Coast ports rather than West Coast ports could narrow.