E/W Pricing: Asia-North Europe

Despite much planning to improve load factors from Asia to Northern Europe, ocean carriers only achieved small freight rate increases between April and July, underlining that supply and demand are not the only drivers behind price variation.

Westbound
Freight rates from Asia to Northern Europe continued on a bumpy road upwards between April and July, with the effect of regular GRIs along the way being sharp but short.

According to the World Container Index, the average all-in freight rate quoted to forwarders for spot cargo from Shanghai to Rotterdam rose from $2,291/40ft in April to $2,365/40ft in May and then to $2,419/40ft in June (see Figure 7).

This meant that the GRIs summarised in Table 2 were only partially successful, which is difficult to explain as vessels were well utilised. The implication is that other factors came into play, including the fact that ocean carriers were negotiating off a comparatively high base, and the threat of P3. The P3 alliance’s impressive array of services were due to be introduced in 3Q 14, so it was not the time to risk losing market share.

Another dampener has been several unscheduled sailings by Zim Line to reposition vessels back to Europe. It pulled out of the trade lane in May, so has had to engage in cut price selling to attract ad hoc busioness, forcing those competitors dependent on the spot market to follow suit.

Ocean carriers’ GRIs of between $550/teu and $1,000/40ft at the beginning of July appears to have fared no better. Although the average spot rate rose from $2,346/40ft on 26 June to $2,783/40ft during the week ended 10 July, industry sources say that prices already started falling back during the following week. Part of the reason could be that these levels are comfortably above break-even point, so the appetite to enforce GRIs in full may not be as high as in July and October, when spot rates were well below $1,400/40ft.

In the meantime, contract freight rates re-negotiated at the end of last year remained low, although, as expected, a couple of cases have surfaced where ocean carriers ‘effectively’ walked away from deals that are no longer acceptable in today’s market. When space is tight, some ocean carriers will obviously prefer cargo that pays at least $500/40ft more than cargo contracted at the beginning of the year.

Eastbound
Freight rates from Northern Europe to Asia remained low between April and July. According to the World Container Index, the average all-in freight rate quoted to forwarders for spot cargo from Rotterdam to Shanghai rose from $856/40ft in April to $884/40ft in May, then stayed there in June, before falling back to $834/40ft in the first week of July 

As ships were less than two thirds full, the result is unsurprising, and ocean carriers have known a lot worse. As it is the peak season from Asia to Europe, ocean carriers need to get empty equipment back to Asia as soon as possible, so have no time to waste on ‘marginal’ marginal cargo.

Our View
Ocean carriers still have an opportunity to increase freight rates from Asia to Northern Europe over the remainder of 3Q 14 as the danger of P3 has been postponed until the beginning of next year, when M2 comes into effect – subject to regulatory approval. Cargo growth is also in their favour.
Source: Drewry Maritime Research (www.drewry.co.uk/ciw)