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Steady rate decline on Asia-Europe as Chinese manufacturing slows    07/04/2018
Signs of slowing Chinese manufacturing at the end of the first quarter are adding to capacity overhang issues on the Asia-Europe trade and heaping downward pressure on spot rates that this week fell to a 12-month low.

Asia-Europe rates have fallen 33 percent in the past six weeks. Photo credit: Hamburg Süd.

After reaching a 2018 high of $916 per TEU on Feb. 23, the week after Lunar New Year, the spot rate began its steep decline to $617 per TEU recorded by the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index (SCFI) this week.

The JOC Shipping and Logistics Pricing Hub that tracks weekly rate movements of the SCFI shows that the Shanghai-Rotterdam spot rate has fallen by 33 percent in the past six weeks, $300 per TEU below the freight rate on Feb. 23. The year-over-year comparison is not much better with the current rate 26 percent below that recorded on April 7, 2017.

Container transport prices on the Asia-Mediterranean trade are slightly less volatile, but the rate this week of $616 per TEU is still a 22 percent decrease on that of Feb. 23, and 25 percent down year over year.

Demand on Asia-Europe in the second quarter is forecast by IHS Markit analysts to grow by about 4 percent, less than half the 8.8 percent increase in capacity SeaIntel is predicting in the trade. Even though this is the slow season, limited withdrawn sailings, declining rates, and excess capacity suggests carriers on the trade are prioritizing market share. 

That was something picked up by transport research analysts at Jefferies, who said in a note to customers, “We sense the container lines are focusing on market share and this traditionally means rates being discounted.”

With the wave of capacity flooding in, carriers will be keeping a close eye on the manufacturing indicators. The IHS Markit Caixin Purchasing Managers’ Index (PMI) shows that production and total new orders expanded at the weakest rates for four months, while export sales increased only marginally. 

Zhengsheng Zhong, director of macroeconomic analysis at Caixin’s CEBM Group, said the deceleration in the manufacturing sector was mainly driven by the supply side while demand has remained relatively stable.

“The growth momentum of the Chinese manufacturing economy may have weakened in March, but at a marginal pace,” he said. “Overall, the manufacturing PMI reading in March showed that demand was not as strong as expected, leading to lower willingness of manufacturers to produce and restock.”

Another indicator of production activity at Asian factories can be found in the demand for product quality control inspections, and data from leading industry provider Asia Inspection present a slightly more positive picture, arguing that manufacturing activity has actually begun to pick up slightly after the Chinese New Year break.

The company said Chinese manufacturing remained unperturbed for now by the US-China trade tariff dispute, with data for the first quarter showing a 5.9 percent year-over-year increase in inspection volume that was expected to rise in the months ahead.

Asia Inspection said growth remained robust in Southeast Asia, with Cambodia continuing to outpace its economic forecast for the second year running as inspection demand rose 22.4 percent compared with the first quarter of 2017. In South Asia, Pakistan also maintained momentum gained during last year, with inspection volume expanding 10.3 percent in the first three months of 2018.

How the container shipping capacity on Asia-Europe is managed will have a significant influence on the supply-demand balance that determines freight rates. Alphaliner said what could possibly mop up some of the capacity being deployed on the Asia-Europe trade was the revamp of service networks by all three alliances. THE Alliance, Ocean Alliance, and the 2M Alliance are set to boost the capacities of existing services on the route with the phasing in of various newbuildings of 14,000 to 22,000 TEU.


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