2017 July 12
Asia to North Europe container traffic is exceeding expectations and, with careful capacity management, carriers should reap the benefit with higher spot rates, according to container shipping analyst Drewry.
Drewry noted that headhaul Asia to North Europe demand growth has slowed slightly since the “breakneck speed” of the first-quarter, according to the latest release by Container Trades Statistics. Westbound shipments after five months increased by 3.8% to 4.1 million teu, whereas the revised first-quarter growth rate was 4.9%.
It said the tapering growth rate “does lend credence to the view” that some shipments were brought forward to March to avoid any anticipated schedule upheaval arising from the realignment of the alliances in April. Nonetheless, the uptick in fortunes for this trade is greater than expected and has led Drewry to carry out a “quite radical revaluation” of its 2017 demand forecast, lifting it from a previous 2.1% to 4% for the year.
According to Drewry’s World Container Index, spot rates for a 40ft box on the benchmark Shanghai-Rotterdam route “shot up” last week by 17% or $284 to $1,936 – “as a result of peak season demand and the 1 July GRIs” (general rate increases) – although that is 4% below the same period last year.
Average 12-month shipments have been steadily rising since the end of 2015 with the average monthly shipment reaching 819,000 teu as of May, around 3% above the same month in 2016, Drewry noted. “Our current annual forecast implies that the growth will plateau somewhat through the remainder of the year,” it added.
“Part of our rationale is that with interest rates at ultra-low levels and falling warehousing costs in Europe, there is less pressure nowadays on retailers having to keep budget-squeezed inventories, which should smooth out some of the peaking in demand throughout the year, especially in the third quarter.”
Drewry said operational capacity on the Asia to North Europe route has so far increased in line with demand growth. “Deliveries of Ultra Large Container Vessels (ULCVs) at the end of the year threaten to tip that balance, but for the time being the fundamentals are supportive of freight rate gains,” Drewry said in its latest Container Insight Weekly report.
Forward schedules indicate that monthly effective westbound capacity will rise to 935,000 teu in August, around 2.6% higher than the same month last year, the analyst noted. That figure includes additional slots from a new SEANES service from CMA CGM due to start in mid-July, on which Cosco and APL will take slots.
“SEANES provides a unique direct link between Europe and Jakarta as well as giving CMA CGM an opportunity to deploy excess owned Panamaxes within its global system,” Drewry noted.
It said westbound spot rates were much less volatile in the first six months of 2017 than the back end of 2016. “The calmer environment is a testament to the fact that the chaos surrounding Hanjin’s bankruptcy has dissipated and because carriers are more adept at aligning tonnage supply with fluctuating demand by means of blanked sailings,” it said.
Drewry believes that the current spot levels will prevail until well into the autumn. “There is a danger that rates could come under pressure in the last three months of 2017 when there will be more capacity in place than in the last quarter of 2016, when all the Hanjin capacity was removed,” it noted.
“Load factors could then dip in the final quarter, although judicious voiding of sailings could moderate any falls in prices, in which event the carriers might find themselves in a position to push for a $200-300 increase in the BCO 40ft rates for 2018 contracts. Were that situation to materialise, the trade could very well return to a state of financial health not witnessed for several years.”
Drewry concluded: “The outlook for this key trade is steadily improving, and with judicious capacity management carriers should see freight rates continue their upwards trajectory.”