If only you could figure out what the freight levels will be in the next 6 months, you could make your shipping arrangements accordingly, depending on how high or low the rates are. While many factors might affect the freight rates, the following study will reveal the estimated rate levels in 2012. I have to warn you; this won’t be pretty…
Transpacific trade is one of the most challenging trades in the world. Since China is the biggest sourcing place for the US, this trade lane has never been busier. It has its own challenges though. Let’s take a closer look at the factors that are affecting the rates.
Due to the high volumes there are a lot of new carriers entering the market each year and some of them close their doors before they even complete their first year. A simple economic model can explain this development. When there are profit opportunities, new companies start to enter the market to take advantage of the profits. With each entry, the market becomes crowded which yields to a surplus in the market. This pushes the rates down because there is more supply in the market than there is demand. Finally, rate decreases yield to losses and eventually steamship lines have to exit the market due to bankruptcies and huge losses. So far this year, The Containership Company filed for bankruptcy. Matson Navigation, CSAV, Horizon Lines and lastly Grand China Shipping announced they are discontinuing and suspending their transpacific trade services. There are rumors that two more carriers might follow this, however I can not disclose the names of those lines here.
Usually carriers that are exiting transpacific trade lane are niche carriers. Niche carriers operate small vessels of 3000 TEU capacity vessels or less than half capacity of the other vessels in the trade lane. In 2000 the average size of new container ships was only 2900 TEU while the largest vessel was around 8200 TEU. By the end of next year, comparing to year 2000, the biggest vessel will double to 16000 and 18000 by 2013. Above 7500 TEU vessels will continue to dominate the vessel deliveries in the next decade. So far this year 36 ships of above 10,000 TEU capacity have already been delivered. 67 ships of over 10,000 TEU capacity are planned for delivery between October 2011 and December 2012, most of which will be deployed toFar East trade.
We also need to look at the situation of the idle container ships as it directly effects the supply. It has continued to rise during the second half of September and reached 156 ships. Overall the total idle capacity has increased to 335,000 TEU, compared to 75000 TEU three months ago. More capacity will be withdrawn as the carriers start their winter program. Market conditions are weak, and not at all as expected. Growth in the mainUStrade lanes has been negative since June. The idle tonnage is expected to rise to above 500,000 TEU by the end of the year, it was 360,000 in December 2010, and the outlook remains negative. More idle vessels means more space scarcity.
On the other hand, fewer shipments means lower inventory. Many of the importers are now working on low inventory trying to cut the inventory related costs.China runs a trade surplus with the world’s three major economic centers – the United States, the European Union, and Japan. Since 2000, the United States has incurred its largest bilateral trade deficit with China. The US trade deficit with China reached a record high in August. The gap between what China buys from US companies and what the Chinese companies sell in the American market was approximately $29 billion in August. A weak Chinese currency gives Chinese goods a price advantage in the US market, and raises the cost of American-made products to Chinese consumers.
The US trade deficit with China means that US companies that can’t compete with cheap Chinese goods must either lower their costs or go out of business. To lower their costs, many companies have started outsourcing to India and China, adding to US unemployment. US manufacturing, as measured by the number of jobs, declined 34% between 1998 and 2010.
Last year was a very good year for all carriers, and they made record profits because rate levels were very high. However trade conditions deteriorated since last winter with container volumes edging up in low single digits. In my last trip to China in March of this year, I observed that the expectations were very strong and major steamship line’s analysts were expecting 6 to 9 percent growth especially after June. Rates were expected to skyrocket due to heavy demand, equipment and space was expected not to meet the high demand. This forecast has not been realized. In fact the spot rates decreased to 22 months lowest level and the overall market situation was worse than expected. So far holiday spending, which is one of the biggest indicator for the shipping industry, is not looking too bright either. Traditionally, September-October are the busiest seasons for shipping industry due to holiday shopping. In Long Beach, the second busiest US container port by volume, August imports fell by 14.2 percent comparing to August 2010. Container traffic fell 2 percent year-over-year in September. Currently space out of China is getting tight, especially to west coast ports. Of course the carriers that stopped their services to the west coast had a great affect on this. Currently, a total of 14 carriers, including the ones that suspended their services, will cut 42600 TEU capacity. This is a substantial number which will eventually affect the freight rates.
The ultimate goal is to decrease 30-40 percent of the existing space starting with November. If this is really put into action, space out of China will be an issue in December onwards and this might create space shortage before the Chinese New Year. Consequently, rates will go up.
So here comes the million dollar question. What will be the rates like in 2012? Well, I wish I had a crystal ball to give you a 100% accurate answer for this. I can however tell you, based on above listed current market indicators, that we will surely see rate hikes before and right after the Chinese New Year. My expectation is a 10 percent rate increase in the first half and another 6 percent increase in the second half of 2012. Of course, many factors might affect this however unless there is a dramatic change in the market, this will be the situation in 2012.