It is anticipated that the trans-pacific spot rates will continue to rise, in the short term at least. That is always a good indicator that the peak season is going to be arriving. This is the trigger for many things to happen including;
(a) Some risks for traveling cargo and the resultant insurance demands
(b) Electronics, clothing and apparel are going to be popular items for shipping
(c) Better times for all the shipping companies, at least in the short run
The Facts and Figures
The figures show a rapid and sharp increment in the Eastbound Trans-Pacific spot rates. At one point the rise was in the double digits for those going to the US East and West coast. This follows three previous weeks of persistent decline, a situation that caused worry about the long term prospects of an industry that has already suffered incredible turmoil. The rate for the East Coast route stood at $2,685 which represents a rise of 37% based on the year-on-year comparison. The West Coast route peaked at $1,687 which represents an annual rise of 28%.
Typical Market Behavior
These trends are not entirely new because they have been happening in the shipping industry over the past few years. Typically, at this time of the year, the US will see a significant rise in the amount of imports coming in from China. This is part of the early preparations for the peak shopping holiday season. Some will be pre-orders that are being delivered in order to meet consumer demand.
On the 1st of July 2017, the general rate increase was announced. The peak season had not yet fully entered into its top gear so any spikes that were initiated by the announcement soon petered out. Some carriers have resorted to filing for rate hikes that as much as $625 per FEU. These were meant to take place at the beginning of August. We will be able to judge the strength of the peak season this year by considering how much the carriers are able to control the price increments and also maintain them up there.
Inevitably this increase in movement and volume will tighten capacity. The result is that the spot rates increase in order to reflect a market that is dictated by the suppliers of shipping services. It is a welcome development for the industry which has been struggling with systemic and endemic structural problems since the major upheavals of 2016.
The behavior of retailers and shippers is very typical around this time of the year. They no longer dispute or try to negotiate the rates down as much as they do in periods where there is less demand for shipping services. The rationale is that they are focused on ensuring that their merchandise gets to US consumers as quickly as possible so as to beat the peak shopping season. This year, the need for competitive practice is even more important as many nations seek to look inwards to reduce their trade deficits. Foreign imports must represent value for money and convenience in order to attract US consumers.
Long-Term Shipping Prospects
The signs are that the shipping industry is moving up, even if it has such a worrying low starting base. The upheavals of 2016 are still raw and present in the minds of carriers as well as everyone that is concerned with that supply chain. Nevertheless, this is no longer an industry termination crisis that it once looked like. Instead, the carriers have learned the lessons of Hanjin and started the process of consolidation in order to give themselves the best chance of competing at the highest levels of the industry.
The Drewry Shipping consultants put this down to the global shift within the standard marketing cycle. We are now in the start off phase that heralds more positive news. It is important to remember that the industry has just absorbed six straight years of losses. A period of prosperity beckons and the signs are that everybody in the sector will step up to the plate to take advantage of the opportunities on offer. The diminishing orders for new vessels has also helped to an extent. That has an impact on the freight rates because they are now determined in a much more efficient manner. Carriers are able to offer multiple trade lanes. Besides the significant carrier consolidation means that there are many giants of the industry which are set to dominate in the foreseeable future.
The consolidation of various carriers as well as the reduction in orders for new ships will be felt on different lanes because they all go some way towards dealing with the recurring problem of overcapacity. According to Drewry, the carriers may be able to earn profits of up to $5 billion globally by the end of 2017.
What This Means for Shippers
The critical determinant of spot rates is now capacity rather than demand when shippers consider how to plan for the future. In the first part of 2017, the imports from Asia were robust with an increase of 4.2% based on an annual comparison. The global fleet of ships is expected to rise by 3.4% by the end of 2017 and might hit 4.7% in 2018. This is where Shippers have to remain very competitive in order to sustain their profitability within the industry. They have to develop competitive models that attract carriers and retain them.
Shippers should plan ahead based on the information that is currently available. For example, they should plan accordingly when shippers expand their capacity where appropriate in order to meet the increasing demands. When carriers are setting spot rates, shippers should pay close attention to carriers that take advantage of the high prices. The existence of high spot rates as well as rolling shipments can very easily blind people to the things that are really important. This industry is all about being prepared and making the necessary adjustments depending on what happens on a given day.
