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East-west spot rates rebound ahead of low-sulfur fuel surcharges    02/12/2019
Spot rates are rising heading into December as IMO 2020 looms.

The application of low-sulfur fuel surcharges on spot cargo from Dec. 1 by major carriers will keep upward pressure on rates that this week rose strongly across both major east-west trades.

Driven by capacity cuts and a host of Dec. 1 rate increase announcements, the spot market reached levels last seen in August. Carriers will be anxious to hold on to the rate gains as they begin to operate vessels with the more expensive low-sulfur fuel ahead of the IMO 2020 Jan. 1 sulfur cap.

Several carriers published customer advisories earlier this month that from Dec. 1, low-sulfur surcharges will be applied to containers shipped on both spot rates and all contracts with a duration of less than three months. Most carriers already have Bunker Adjustment Factor (BAF) formulas in place for cargo shipped under longer contracts. 

Asia-US trades led the rate recovery, with Shanghai-US East Coast rates increasing by 19 percent over last week to $2,684 per FEU, and rates to the US West Coast were up 12.5 percent to $1,405 per FEU, according to the latest reading of the Shanghai Shipping Exchange’s SCFI.

Weekly rate movements are tracked at the JOC Shipping & Logistics Pricing Hub, and they show that even with the weekly gains, the US East Coast rates are 21 percent below the same week last year, and US West Coast rates are down 36 percent.

 

In comparison to 2017 rates, however, the spot prices to the East Coast are now almost equal, and up more than 4 percent for West Coast routings. So far, there hasn’t been a significant wave of blank sailings announced for January, offering hope for a pre-Chinese New Year bump in volume.

China-North Europe spot rates in September-October 2019 increased 8.4 percent to $766 per TEU, and are up 2.5 percent on the same week last year.

Downward demand trend

What remains unclear, however, is what role rising demand is playing in the rate increases. The volume data for October from Container Trades Statistics for Asia-Europe will only be available from mid December, but the trend has been one of declining volume.

On Asia-North Europe, volume growth has been declining since March but in September turned negative at minus 3.4 percent compared to the same month last year. 

October data from PIERS, a sister company of the JOC within IHS Markit, shows US imports from Asia declining by 11 percent year over year. According to a report this week by BIMCO, the slowdown in trans-Pacific demand is showing no signs of easing, and should the latest round of tariffs be implemented on Dec. 15 as planned, virtually all US imports from China will be subject to tariffs.

The shipping association said this would cause further harm to the shipping industry at the same time as costs were increasing as a result of the IMO 2020 sulphur cap.

 

“A continued reshuffling in manufacturing in Asia may offer some upside, once processes are up and running. But, as BIMCO has previously said, there are no winners in a trade war, and this is already being felt across the board by shipping in 2019,” BIMCO stated in its market update.

“The new year will bring not only the sulphur cap, but also skewed exports caused by the Chinese New Year. ”

Chinese New Year begins on Jan. 25, a good two weeks earlier than this year, and BIMCO said pushing out goods ahead of widespread factory closures may bring a boost in January, but the association predicted that would be followed by a slow “and possibly painful” February for carriers.

The extent to which US retailers will rebuild their inventories, kept high by the front-loading of late 2018, remains a big question mark. US inventory-to-sales ratios hit a 10-year high of 1.51 in March and had only fallen to 1.4 in September, the latest reading from the US Census Bureau. That’s suppressed the need for reordering, with US imports from Asia up just 0.2 percent in the first 10 months of the year, according to PIERS. Eastbound trans-Pacific volumes will end the year down 2 percent from 2018, the first negative year in a decade, according to maritime analyst Alphaliner. 

Carrier punctuality improving

While demand continues to lag, one positive for carriers is that their on-time arrival continues to be superior compared to the performance delivered in 2018, even though it slipped slightly in the September-October period.

Data from Sea-Intelligence shows that on Asia-North Europe, vessels arrived within a day of published times 87.7 percent of the time during the two months, which was 17 percent better than the reliability delivered last year, and half a percentage point lower than that recorded in August-September. On the Asia-Mediterranean trade, schedule reliability remained almost 22 percent better than September-October 2018 at 86.4 percent.

On Asia-US trades, routes to both the US east and west coasts remained well above the September-October levels, with the West Coast schedule reliability improving by almost 30 percent year over year, and the West Coast up 14 percent compared to the same period in 2018.

In percentage terms, the  improvement may appear impressive, but what it really highlights is just how dismal the trans-Pacific schedule reliability was in the September-October period of 2018. Asia-US East Coast on-time performance was just 46 percent, and Asia-US West Coast schedule reliability was 49 percent.

That performance improved in September-October 2019, but only to 75 percent to the West Coast, and 63 percent to the East Coast.

 




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