An ongoing pattern of rate erosion on east-west container trades continues, despite the success of the most recent general rate increase. This has thus far been the trend with all rate increases year to date.
Yet another example of this failure to maintain GRIs on container shipping pricing are the current trans-Pacific eastbound spot rates, which plummeted nearly 9% in the ten days since the July 1 rate increase.
Container Shipping Rate Erosion on Trans-Pacific Trade
According to the Container Rate Benchmark, published by London-based consultant and analyst Drewry, the average spot rate from Hong Kong to Los Angeles dropped by $200, to $2,036 per 40-ft-equivalent unit from July 3rd to July 10th, accounting for half of the $400-per-FEU July 1 general rate increase.
Drewry Shipping Consultants head of container research Neil Dekker indicates, “In previous GRIs, whatever traction the container carriers gained in the first couple of days has generally been lost in the next 7-10 days, so then the container carriers are back to Square One. Then they’ve had another GRI the following month.”
Copenhagen’s SeaIntel Maritime Analysis CEO Lars Jensen says that on the trans-Pacific, container carriers are not being favored by supply and demand. While vessel capacity is up by approximately 10% on Asia to U.S. East and West coast services, demand is far from reaching the same level of growth.
In the wake of the most recent drop in spot rates, the Drewry trans-Pacific benchmark is down 16.7% year-over-year. “The decline is largely driven by the cascading of larger vessels into the trade, which is hurting the rates,” said Jensen. “It will be very difficult on the trans-Pacific for container carriers to have long-term sustainable rate increases because supply versus demand is not working in their favor.”
Not only are the Trans-Pacific rates taking a hit as a result of the cascading of container capacity, but also some cargo carriers are launching new services:
- In May, Evergreen Line launched a new CPS-2 service with 4,500-TEU ships, calling on ports in Shanghai and Ningbo in China, and in Los Angeles and Oakland in the United States.
- In the spring, China Shipping and United Arab Shipping also started a new joint service between South China and the United States Southwest.
Dekker said of the new services, “that’s capacity that isn’t really needed in terms of demand growth.”
“The feedback I’ve had in the last month is that ships are by no means running full, but not as bad as on Asia-Europe,” Dekker said. “I’ve not heard anything from carriers and shippers that there is going to be a really good peak season this year.”
The Transpacific Stabilization Agreement, (the discussion agreement among 15 container carriers in the Asia-to-U.S. trade), has recommended an August 1 peak-season surcharge of $400 per FEU as a guideline, but Dekker is unconvinced that the container carriers will get the full amount. “If they market it as a peak-season surcharge, there are no signals from any source that the demand is there.”
Adding to trans-Pacific capacity are those container carriers who have shifted some services from Asia to the U.S. East Coast via the Panama Canal route (using 5,000-TEU-class vessels) to post-Panama container vessels traversing the Suez Canal route (using 8,000-TEU-class and larger vessels). The objective is to reduce slot costs by replacing smaller container vessels with larger capacity ships.
“Gradually we are seeing all the carriers cascade vessels over to the Suez route,” Jensen said.
Unless container carriers on the trans-Pacific take stronger measures to limit vessel capacity, the pattern of post-GRI rate erosion will continue. “How long can they hardline a general rate increase in a market where the fundamentals are weak and the capacity is strong?” Dekker said.
Stay tuned for ongoing updates regarding trans-Pacific rates and other topics of import for manufacturers, wholesalers and companies who rely on container carrier services for their overseas operations.
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