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Panama Canal draft limits lift trans-Pacific spot rates    13/05/2019
Drought conditions in Panama are restricting capacity and forcing East Coast spot rates higher, even as rates to the West Coast dropped this week.

The spot rate to the US West Coast dropped below $1,500 per FEU this year for the first time since March 8. However, the rate of $1,442 was only 4.3 percent higher than one year ago, indicating spot rates are experiencing the normal seasonal lull before back-to-school imports pick up in early summer.

The spot rate this week of $2,711 per FEU to the East Coast was 14.7 percent higher than the rate of $2,364 one year ago, according to the Shanghai Containerized Freight Index published under the JOC Shipping & Logistics Pricing Hub.

The larger spread on East Coast rates may be due to draft limitations at the Panama Canal, which reduces container capacity on all-water services to the East Coast. The Freightos Baltic Index lists the East Coast spot rate this week as being 23 percent higher year over year. “Capacity is constrained by the Panama Canal Authority reducing capacity of large ships due to an extended drought,” said Eytan Buchman, CMO at Freightos. Normally, the spread between East Coast and West Coast spot rates is about $1,000, but this week East Coast rates are $1,269 higher, which also supports the Panama Canal effect.

The outlook for spot rates in the coming weeks is uncertain due to the Trump administration’s increase of tariffs on more than $200 billion worth of imports from China from 10 percent to 25 percent, effective Friday. US-China negotiations are on-going. Retailers and manufacturers are still working down the inventories they front-loaded in late 2018 before the first deadline for 25 percent tariffs on Jan. 1, 2019, which was delayed. Therefore, a prolonged tariff war could squeeze US imports, which would drive down spot rates in the coming weeks unless carries slashed capacity as they did late last year with about three dozen blank sailings.

On the flip side, if US importers take seriously Trump’s threats to add the remaining $300 billion in Chinese goods -- a list that includes previously spared products like cell phones, laptop computers, and video game consoles -- they could potentially front-load imports again this year, causing another early peak season and driving spot rates up sooner than usual.

Until recently, spot rates to both coasts were consistently higher than during the same weeks last year. The 2019 West Coast spot rate peaked on Feb. 15, reflecting the final  shipments before factories in Asia closed for the Lunar New Year celebrations, at $1,834 per FEU to the West Coast and $2,968 per FEU to the East Coast. In 2018, spot rates remained below $1,500 to the West Coast and $2,500 to the East Coast until the end of June. Spot rates accelerated faster than normal last summer due to the 10 percent Trump administration tariffs on imports from China in September, peaking at $2,606 per FEU to the West Coast and $3,739 per FEU to the East Coast in early November.

Despite the uncertainties surrounding the tariffs, retailers project relatively strong imports at least through the summer months. Global Port Tracker, published by the National Retail Federation and Hackett Associates, projects US imports will be 3.9 percent higher in the first half of the year compared to the first six  months of 2018. Imports are projected to be 3 percent higher in July and 4.6 percent higher in August year over year. According to PIERS, a  sister company within IHS Markit, imports from Asia in the first quarter were down 0.4 percent, but total US containerized imports from all countries were up 2.4 percent year over year.

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