Alert: murky waters ahead! A recent turn of events in the shipping arena will delight shippers, but dishearten carriers. At least in the short run that is, as the shipping industry continues to experience a decrease in ocean freight rates. It’s a known fact that the global shipping industry is a cyclical one, greatly influenced by the market forces of good ol’ supply and demand.
Typically, freight rates are determined by factors affecting ship availability and tonnage capacity. In addition, infrastructure changes such as the ability large ports to accommodate bigger ships are a contributing factor to the current drop. The World Container Index assessed by leading independent provider of research and consulting services to the maritime and shipping industry, Drewry, reveal information that will be received with mostly cheers across the industry.
A Sinking Ship?
The data shows that a composite of container freight cost on eight major routes to and from the US, Asia, and Europe had dropped 1.8 percent to $1,511.64 per forty-foot equivalent unit (FEU) for the first week of February. This translates into a 14.6 percent decrease from a year ago according to Sourcing Journal Online. The average composite index (thanks again Drewry) on a year-to-date basis was $1,463 for each container, representing a $110 decline from the five-year average of $1,573. The composite index dropped $27 to $1,512 per FEU last week. Freight rates decreased $88 per FEU to $2,856, while prices on Shanghai – Los Angeles routes fell $46 from the first week of February to $1,519 per FEU.
Nevertheless, rates from Shanghai to Genoa, Italy remain unchanged while freight cost on the Shanghai to Rotterdam (Netherlands) routes dropped $41 and now stand at $1,772 per FEU. Despite the widespread drop, rates on the Rotterdam – New York routes rose $78 to $2,067 per FEU on the back of general increases on transatlantic trade. With the Chinese spring festival, just less than a week away, Drewry expects freight rates to fall further “on account of demand downturn during the Chinese spring festival.” This will be occasioned by massive factory closures in China and Vietnam.
The Gas is Too Damn High
On the other hand, rising fuel prices loom in front of shippers. This in turn, has the potential to erode the benefits derivable from low freight costs. Higher bunker fuel prices are driving up surcharges, squeezing both shippers and carriers. Bunker fuel prices rose by about 130% over the last two years to $390 per ton in New York, Rotterdam, and Shanghai, after reaching a 3-year low of $170.05 in January 2016, information from HIS Markit suggests. Considering the fact that a 20,000 teu container vessel consumes about 250 tons each day it spends at sea, the implications of this on sustained profitability are clear.