Prolonged trans-Pacific spot slump has shippers eyeing contract reductions
Trans-Pacific container lines are accelerating their blank sailings and pulling back on deployed capacity for the rest of the year, but the moves still haven’t been enough to halt a months-long slide in spot rates.
Carriers for November had blanked 499,889 TEU of capacity to the US East and West coasts as of Nov. 11, or 19.2 percent of total capacity of 2.6 million TEU, according to Sea-Intelligence Maritime Analysis. That’s up from 446,756 TEU in blanks, or 17.1 percent of total capacity of 2.6 million TEU as of Nov. 4.
For December, Sea-Intelligence now projects that 247,025 TEU will be blanked on the eastbound trans-Pacific, or 9.1 percent of total capacity of 2.71 million TEU. Last week, it put December blankings at 212,913 TEU, or 7.7 percent of total capacity of 2.76 million TEU.
Despite the withdrawing of capacity, the downward move in rates continues. Asia-to-US West Coast spot rates fell to $1,491 per FEU on Nov. 10, according to data from Xeneta, the lowest for the trade that the rate benchmarking platform has shown since May 2020. Drewry spot rate data measured Asia–US West Coast spot rates at $2,262 per FEU, the lowest since June 2020.
“The continuing decline in spot rates begins to feel more and more like a feeding frenzy in shark-infested waters,” Sea-Intelligence said in its most recent Sunday Spotlight newsletter.
Contract rates on the trans-Pacific are following the same pattern as spot rates, albeit at elevated levels and with the continued higher-than-usual premium on Asia–US East Coast services. That’s due in part to continued uncertainty about longshore labor negotiations on the US West Coast.
With demand for 2023 uncertain as the US economy teeters and a slew of new capacity hitting the water next year, container lines are cautiously eying trans-Pacific service contract talks in a market where demand has weakened, causing the severe port bottlenecks to dissipate. That, in turn, has freed up capacity.
“I think everybody expected that at some point in time, you know that congestion would ease and there would be somewhat of a slowdown in demand,” Hapag-Lloyd CEO Ralf Habben Jansen told JOC.com in an interview Nov 11.
“But to be honest, I’m not really surprised,” Habben Jansen added. “We already said, end of 2022, I think things are going to normalize. And, in the course of the second half, I think that’s exactly what we have seen. And then, of course, what you see, as soon as congestion eases, people all of a sudden get a lot of inventory, because all these millions of TEU that were stuck in a queue, all of a sudden, get delivered into those warehouses.”
Signs of a rate war
Forwarders and analysts tell JOC.com that they’re seeing signs of a rate war, even after container lines displayed capacity restraint for the last three years. The recent capacity overhang is now diminishing carrier hopes that the market will reach a bottom prior to the start of annual contract negotiations on the trans-Pacific in the spring of 2023.
The slump in container spot rates — from highs of $22,000 per FEU to the US West Coast to lows of $750 — is fueling some shippers’ ambitions to get their metaphorical pound of flesh from container lines that they feel have gouged them during the past two years. Container lines counter that pricing was a function of demand outpacing vessel capacity, and as US port congestion eases, service will recover.
“We are starting to see good improvement on the standard ocean rates even compared to our contracts that we entered into in May, and so we would expect that to carry into next year as well, and do some improvement year over year on the ocean freight side next year,” Mike Stornant, Wolverine Worldwide’s executive vice president and CFO, said in an earnings call Nov. 9.
Greg Hicks, Canadian Tire president and CEO, had a similar refrain in his company’s Nov. 10 earnings call. “Freight rates started to come down in September and have continued to drop through the early part of this quarter,” he said. “We are negotiating our contracted rates with carriers for 2023 as we speak.”
No foregone conclusion
Not everyone believes it will take until the end of the first quarter or first half of 2023 for normal shipper ordering, and thus an uptick in container volume, to resume.
One forwarder who did not want to be identified told JOC.com its data show that week-to-week volume patterns in the second half of 2022 mirror what it saw in 2019. While absolute volume in 2022 is a tick lower than in 2019 — mostly because of front-loading of volume in the first half of the year — the trendline suggests that the trans-Pacific trade lane is falling into a familiar pattern that might prompt normalized ordering from shippers in early 2023, the forwarder said.
In addition, shippers will be incentivized to start replenishing inventories in the first quarter of the new year, despite warehouses being full of inventory, in the name of keeping trusted suppliers in Asia solvent, the forwarder added.
One other dynamic to note: Shippers might be induced to pull forward orders from Asia into the first quarter to take advantage of low spot rates or short-term contract rate reductions prior to spring contract negotiations, the forwarder said.
“Although spot rates have declined and are close to or below the pre-pandemic levels, the more important fixed contract rates will not settle at levels we saw in the mid-to-late 2010s,” Stephanie Loomis, vice president of procurement at non-vessel-operating common carrier CargoTrans, wrote in a LinkedIn post Tuesday.
“The spot rates will be the interesting market to watch,” she added. “I fully expect that the carriers will push for contracts on the (eastbound trans-Pacific) in the spring at a rate as high as they can, (so) the seemingly unending erosion of spot rates will give the importers a very strong negotiating position.”
Habben Jansen suggested that higher interest rates will keep shippers from bolstering inventory levels too high, although he said US consumer spending remains robust, a potential positive for those who believe demand can return to robust levels in 2023.
“The US economy is not down 20 percent and consumer spending in the US is also not down 5 percent,” he said. “That situation will potentially also normalize again, quite quickly. We’ve learned in 2020 how quickly these things can change, because then everybody cut orders as soon as COVID started. And then, three months later, it turned out that demand was actually much stronger than people had anticipated.”
Source: Journal of Commerce
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