North/South: Asia-ECSA in Post-World Cup blues

Slowing demand growth in the once booming Asia-ECSA trade is hurting carriers, threatening the likely success of future GRIs.

The party seems to be over for this year in the Asia to East Coast of South America trade. Following an early year surge caused by extra shipments required for the FIFA World Cup in Brazil staged in June and July, the pace of cargo growth has fallen off a cliff in recent months.
Asian-origin cargo discharged at East Coast of South America ports reached 119,000 teu in May, which beat April’s 107,000 teu but represented year-on-year growth of only 2.8%. To demonstrate the extent of the slowdown, demand growth in the first two months of the year was around 14%, which suggested at the time that the annual growth of 8.5% achieved in 2013 could be exceeded. That now seems unlikely as volumes after five months are only up by a much more modest 5%.

The weakening purchasing power of Brazilian consumers caused by the devaluation of the real is hurting imports, but shipments to Brazil are holding up better – up 6.5% year-on-year in May – than to the smaller Plate region of Argentina and Uruguay, which saw volumes slide by 8.6% Y/Y for the same month.

On the plus side for carriers, the second half of the year tends to be stronger for shipments than the first six months so there is the prospect of better things to come.

Where the weaker Brazilian real is limiting import growth, it is having the reverse effect on exports. Cargo from ECSA back to Asia increased to 61,000 teu in May, up from 58,000 teu in April. On a year-on-year basis the monthly exports increased by 14%, which is the same rate for the year-to-date and on par with the annual growth recorded last year. It should be remembered however that the headhaul trade out of Asia is dominant by a factor of around 2.2:1.

Considering the weaker demand outlook, it is somewhat surprising that carriers have not done more to reduce the capacity available to the market. There were no missed sailings recorded for either June or July with only minor port changes made, meaning that southbound Asia to ECSA capacity barely moved.

Bigger ships continue to enter the trade with the latest being Hamburg Süd’s 9,800 teu newbuild Cap San Tainaro, deployed on the SEAS2 loop. More sister ships will follow in the coming months, which will increase the average size of ship in operation in the trade from 7,300 teu as of July.

The month-on-month improvement in southbound cargo and virtually stagnant capacity in May contributed to a modest increase in average vessel utilisation, which rose to an estimated 80% in May from 74% in April.

However, it wasn’t enough to lift spot market freight rates as according to Drewry’s Container Freight Rate Insight, the average all-in rate from Shanghai to Santos fell back from $2,120/40ft in April to $1,930/40ft in May.

Spot rates for June subsequently increased by over $500 per 40ft, which suggests either that southbound cargo volume for the month was considerably better than expected – available capacity was unchanged – or that carriers hard lined General Rate Increases (GRIs) to improve their bargaining position ahead of 1 July quarterly contract signings.

A number of carriers have requested a GRI of $750 per teu for early August (the effective date ranges from 1 August to 15 August depending on the carrier) but unless the underlying conditions improve dramatically it is difficult to make a case for them being entirely successful.

Our View
Slowing Asia-ECSA cargo growth will mean that carriers have to pay extra attention to the supply side. With bigger ships entering the trade and uncertain demand prospects spot freight rates will remain under pressure.
Source: Drewry Maritime Research (www.drewry.co.uk/ciw)