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Asia-ECSA spot rate plunge gives little contract outlook visibility    07/02/2018
The Asia to East Coast of South America (ECSA) trade lane is among the most volatile in the world and a lucrative trade lane — but it is for the former reason that shippers should not attempt to form any conclusions about upcoming annual contact negotiations — at least not from February spot data, industry experts say.

A container ship at the Port of Santos, Brazil.

Volatility characterizes the Asia to East Coast of South America trade lane. Above: the Port of Santos. Photo credit: Shutterstock.

Despite high spot rates for the last 12 months, the spot rate fell 13.9 percent — from $2,923 to $2,517 — during

the Jan. 12 week, according to the Shanghai Containerized Freight Index (SCFI), but it stayed “within range”

according to Alan Murphy, CEO and partner at SeaIntel Maritime Analysis. The following week (Jan. 19), it

slipped another 13 percent to $2,179 — with price volatility visible over the past 18 months to two years. And that

volatility may produce a price rebound in the months ahead, analysts say.

One example of that volatility is in August/September 2017, just five extra loaders in the trade lane drove freight rates down from $3,800 per TEU to $2,200 but within weeks they were back up to $3,500 per TEU.

Last year, spot market freight rates on this trade lane ranged from $2,500 to $3,500 per TEU — but the early 2018 slump has seen rates slip below the Asia to East Coast US market.

Xeneta CEO Patrik Berglund said that current spot rates would not have a dramatic impact on annual contract negotiations, as they are too far away from May, the start for most service contract rates.

“These negotiations take time so I would wait and see what happens to the freight rates during February," Berglund said.

Furthermore, Murphy noted the limited service on the line plays a major in its volatility. “Without a doubt, this is the most volatile trade lane in the world today and that is largely down to the fact that there have only been three services operating in it since the slashing of capacity and services, which started in the early part of 2016,” Murphy said. “Prior to that there were seven services and more than 30 percent more capacity.”

“The Asia to ECSA trade lane is a niche trade and if you compare its current three services with the Asia to West Coast USA,  which has around 40 services, you can see that if one or two vessels are added — or taken away — in any given week, it can make a huge difference,” Murphy added.

On the other hand, Murphy said, if one service on the Asia to West Coast US is blocked or canceled it will have only “a limited impact.”

“But with just three services, this makes the trade lane much more volatile, and freight rates can fluctuate a lot more when there are so few players,” Murphy said.

Freight rates had previously been horribly low, Murphy noted, and at one point they were at just $99 per TEU on the spot market. Since then, after the capacity was pulled, the spot rate has been consistently above $2,500 per TEU.

Regarding the recent January decline, Murphy, like Berglund, added a note of caution, “I don’t know if that early January fall is a signifier of a wider thing because it has swung by that amount a few times in the past year."

Shanghai to Santos over the past year has dropped four or six times, and that $406 swing in one week in early January was not the largest move, he noted.

"In September it dropped by $546 per TEU but that was from a higher range. Although last week it dropped by $227 per TEU in the weeks before that it rose $128 and jumped $341. So overall, it has been swinging up and down for about a year now,” Murphy said.

SCFI figures showed that between 2010 and late 2013, spot rates ranged between $1,000 and $2000 per TEU, and then fluctuated rapidly and more frequently from there until the end of 2015/early 2016, when they plunged to as low as $100 per TEU at times, and barely over $500 at best. That was when the plan to cull capacity was put into practice.

Xeneta’s Berglund seconded the aforementioned analysis, noting that short-term and spot rates were fluctuating wildly, but long-term rates were relatively stable and certainly much higher than early 2016.

“The Asia to ECSA trade route has been on a crazy dance over the past two years,” Berglund said. “At least that is the conclusion from observing our data on freight rates over that period.”

Xeneta’s data show that China (main ports) to ECSA rolling average rates for six-month (or longer) contracts for FEU standard dry cargo were being signed for $2,700 in early January 2016, up from $2,200 in mid-December 2016. That six-month rate rose again to $2,900 at the end of January 2016. Later, in June 2016, the rate was barely over $1,000 per FEU, then rose in stages up to $3,800 by April 2017, before falling back to $2,400 where it stayed until December 2017.

“If I was a shipper I would not want to close an annual contract now because the rates are so volatile. It would be a complete gamble,” Berglund said. “The long-term rates follow the spot rates, so long-term rates should come down a bit over the next few months, but might go up again — such is the volatility. I think it is better to wait if there is a May cut off and see what happens over the next two months. Historically, these are high spot rates right now, north of $3,000 per FEU, so they might dip a bit lower.”

He added that if he was a shipper looking to sign a long-term, three-month-plus contract over the next few days he would expect to see rates of $2,200 to $2,900 per FEU from China to ECSA. For Shanghai to the Port of Santos — the main port for Brazil and recipient of more than 33 percent of all the country’s containers, around 3.5 million TEU annually — a shipper might be offered a slightly lower rate, with long-term contracts fluctuating between $2,100 and $2,500 per FEU.

According to Freightos, a freight pricing company, the median freight rate, per FEU, from Asia to ECSA was $4,100 during week one of 2018, compared with $3,000 during the same week of 2017. Freightos’ data also displayed the wild fluctuations that characterize this market, showing the rate at $3,400 per FEU in week 51 of 2017, $4,000 in week 49 of 2017, and as low as $3,150 as recently as week 45 of 2017. The Hong Kong-based company’s data also showed that rates ramped up from $2,000 per FEU in week 9 of 2017 to $4,000 per FEU by week 27 of 2017.

Of course, whether rising rates are good is a matter of perspective; Carriers like them, but shippers, understandably, do not. Moreover, shippers are becoming increasingly worried about the fall off in services on the Asia to ECSA trade and the lack of competition.

The Brazilian Coffee Exporters Association (Cecafe) is concerned that the reduction of services to the Far East and to other regions of the world has caused a spike in prices and a concentration of exports out of Santos. Santos now accounts for about 86 percent of Brazilian coffee exports, up from less than 80 percent a few years ago. “We are taking this up with the Ministry of Transport in Brasilia and hope something can be done to bring back more services,” said one Santos-based consultant who works closely with Cecafe.

Rod Riseborough, CEO of Container Trade Statistics, said he had also observed the fluctuations, but suggested rates could stay high this year as long as all carriers keep capacity in line with demand.

“The carriers have now matched capacity to the trade available, rather than everyone trying to increase market share,” Riseborough said.

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