Ocean container markets enjoyed a surprisingly strong start to 2017, albeit one complicated by a reshuffle of the ocean shipping liner alliance system. But will demand and rates continue their bounce back during the rest of the year?

Although container spot rates on key lanes from Asia to Europe have slid in recent weeks, demand has been resurgent so far in 2017. Ocean box volumes were 10% stronger in Q1 compared to the same period of 2016 with expansion apparent on all key lanes and reflected in freight pricing trends.

Spot freight rates this year remain far ahead of the admittedly low troughs recorded in the first half of 2016.  Lines used the upturn to push through long-term shipping contracts at around double the rates of a year earlier on the Europe-Asia trade. Contract negotiations on the Transpacific trade were reaching their conclusion as Forwarder went to press and similar rate hikes are also expected there.

But why?

First to demand. After the sharp rise in loadings in Q4 2016, most observers predicted a slowdown in the early months of 2017. They were wrong. Instead the strong end to the year acted as a ramp, propelling shipping markets upwards despite the traditional trade shutdown around Chinese New Year. Multiple factors have been at play. Consumer sentiment in the US and Europe has been positive, economic growth has been higher than expected and a cyclical recovery in demand has meant inventories required restocking. Trade has also been boosted by rising demand in emerging economies, not least for imports of industrial and food products to China.

As a result, expectations that Brexit and a protectionist US administration would dampen trading fervour have not come to bear. Indeed, the opposite has been the case. The IMF now expects global economic growth to increase from an estimated 3.1 percent in 2016 to 3.5 percent in 2017 and 3.6 percent in 2018, while global trade is projected to grow at a rate of close to 4 percent in 2017–18, up from 2.2% in 2016.

Allied for whose benefit?

On top of the surprising surge in demand, ocean shipping capacity at key moments has been restricted by changes in the global structure of container line alliances. In simple terms, this saw four global alliances become three – 2M, Ocean Alliance and THE Alliance – in April. And the three now control the majority of box shipping capacity on Transpacific lanes and a major chunk of the Asia-Europe trade.

But the rejig to the new mega-alliance structure was not simple. Enabling the Ocean Alliance and THE Alliance to launch their new networks, and the 2M Alliance to push out new services, meant

carriers repositioning hundreds of ships, a lengthy process given transit times. Many also changed terminal calls within individual ports, a transition which involves significant planning ahead. So rather than a switch being flipped on April Fools’ Day, instead there was supply chain disruption over a number of months.

The first signs of this disruption were felt in Europe. Higher than anticipated demand for industrial and consumer exports from Europe to Asia – mostly to China – allied to an early Chinese New Year with its usual raft of blank sailings saw container lines off balance as they adjusted schedules in time for April. The result was a lack of capacity in northern European ports which saw forwarders forced to pay premiums for slots. Some low value cargoes were also forced out of the market as rates spiked.

Then in April alliance tinkering added to bad weather at key load ports in China saw loading backlogs build at major hubs such as Ningbo and Shanghai, causing a ripple of service disorder across Asian shipping networks. The disruptions then spread to US ports in early May.

The net effect of port congestion and vessel redeployments was to take some box capacity out of a market still suffering from excess capacity, enabling lines to cling on to a larger chunk of General Rate Increases than they might have otherwise expected.

As May has progressed and alliance teething issues have eased, rates on Transpacific and Asia-Europe lanes have subsided somewhat, aided by the usual seasonal low ahead of the Q3 peak season. But they remain substantially higher than a year earlier as evidenced by the World Container Index, a composite of container freight rates on eight major routes to and from the US, Europe and Asia, which  was up by 43% year-on-year on 18 May, according to Drewry.

All aboard for peak tide

As the market prepares for the ocean shipping peak season, the economic outlook is positive and senior forwarding and liner executives are almost unanimously optimistic about the rest of the year. Concerns over protectionist rhetoric and geopolitical unrest have not been an obstruction to trade, although Brexit and Trump’s ‘randomness’ on foreign and trade policy remain risks to future demand.

Disappointing recent PMI indicators from major exporting countries in Asia are expected to be only a short-term blip, while deliveries of container newbuild vessels this year will also be slower than in 2016. Lines have also shown a heightened willingness to refuse bottom-feeding rates – a trend easier to reinforce following the bankruptcy of Hanjin Shipping last year as nobody wants their cargo and reputations to be stranded at sea for the sake of a few dollars more.

After an early summer lull, trade volumes moving by sea will again accelerate in Q3. Freight rates seem likely to be dragged with them if lines maintain discipline. Forwarders who can bump up margins on higher spot rates are likely to benefit.

 

Michael King,
Contributing Editor, FORWARDER magazine