Data gathered from a Freightos report shows that the China-U.S. ocean rates have been hitting noticeable lows from the start of this year. The fall in prices is even more relevant when compared with the prices that held up last year – year-on-year rates have been falling for the 32nd straight week. The current rate of the China-U.S. West Coast is 26% lower compared to 2017, and the China-U.S. East Coast has recorded a 19% lower rate against last year.
Though the gap between the prices reduced during this February, the Chinese New Year had its toll on the freight pricing sinking it by $600 per FEU in the China-U.S. West Coast. A week before the Chinese New Year, the rates were at a $1412 per FEU precipice, falling dramatically to $812 per FEU in a month.
Eytan Buchman, the VP of Marketing at Freightos, explained that this trend is heavily dependant on seasonality. As is visible from the range, the prices went up for a month before the new year, with companies rushing to flush out their inventories and reach retailers before the new year’s onset. As this led to a massive supply and inadequate capacity situation, the rates kept climbing till the new year, after which it fell back to a rate which is comparable to the rates of the previous month.
But the steady decline in ocean freight rates for over six months year-on-year is a problem. “The problem with the ocean freight trend is still about going back to the underlying industry issue, which is over capacity. There is too much ocean freight capacity and a lot less shipments being pushed out,” said Buchman. “If you look at air freight, prices have been very strong. While with air freight, there is a certain amount of support from the e-commerce boom, ocean freight’s underlying supply and demand trends just point that overcapacity is something that continues to impact the market.”
China-U.S. air freight rates have been steadily increasing all year, starting at $1.15/kg at the end of January to $1.65/kg in March and now at $1.85/kg in April. The higher rates are attributed to limited capacity on Europe-U.S. flights and also to the Euro relatively weakening out against the USD, when considering its meteoric rise a few months back.
But as Buchman agreed, the impact that e-commerce has in determining air freight prices cannot be discounted. “Supply chains are more complex today with more specifics and volatile sourcing, which makes air freight a necessity. It is not that ocean freight can’t provide that, it is just that in order to get that, we need accuracy with ocean freight and companies need to plan better and in advance on where and when you need inventories,” he said.
This trend helps larger and more sophisticated companies to leverage ocean freight and cut transport costs by intricately handling their supply chains. “These companies split their cargo and send some of it by air freight and send the remaining by ocean freight in order to balance their inventory,” said Buchman.
Alphaliner, a shipping data analytics firm predicts that the ocean freight rates would fall as we go further along as it sees an 8% increase in capacity by July. The reason for ocean freight rates decline rests squarely on the shoulders of large shipping companies, which are relentlessly working towards increasing capacity while demand continues to scratch the surface. New services have been announced by South Korea’s SM Line and APL, while the Ocean Alliance is anticipated to scale up capacity by around 10% this year.
Though volumes do increase year-on-year, the capacity growth is hardly proportional which might help the cause of shippers who are now in the position to dictate rates. Though prices have not hit rock-bottom, it still is low enough to be of concern to carriers and predicting the future accurately seems to be an improbable task.
“It is always difficult to project with any accuracy, but based on previous trends I can’t imagine freight prices climbing too high. We can anticipate stable ocean rates for now,” said Buchman. “The kind of situation we are in, is similar to the time before Hanjin declared bankruptcy in September 2016. You are looking at a situation where there is too much supply and not enough demand to go with driving profitable unit economics for carriers.”
Nonetheless, the General Rate Increase (GRI) seems to be holding up, as the ocean freight rates have not seen landslide declines this week, as rates dropped by 2% in the East Coast and by 5% in the West Coast compared to last week. This could be a saving grace for carriers heading into contract negotiations – for instance, Maersk has gone ahead and announced a contract increase for customers with service contract rates expiring on April 14. Other carriers are following suit and have announced GRIs for both April 15 and May 1.
Stay up-to-date with the latest commentary and insights on FreightTech and the impact to the markets by subscribing.