Continued blanked Asia-Europe box sailings expected to bolster rates

Following a weak pre-Golden Week peak, demand has remained soft, says Flexport, anticipating further extensive sailing cancellations from carriers throughout October and November to help boost prices and slow further erosion, until demand recovers in December, ahead of Chinese New Year.

US freight forwarder Flexport expects continued blanked sailings on the Asia-Europe container trades, bolstering rates, while demand will recover in December as the Chinese New Year approaches.

Martin Holst-Mikkelsen, senior director of EMEA ocean freight at the digital forwarder, told Lloyd’s Loading List: “We didn’t experience a strong peak season leading up to Golden Week in China as the market overall anticipated. Demand has remained soft, while capacity has been steadily increasing year-over-year.

“To help balance supply and demand, there will be an extensive blank sailing programme from carriers throughout October and November. This will help bolster rates and slow further rate erosion. Demand is expected to recover in December, ahead of Chinese New Year.”

In the short term, Flexport does not expect a strong direct impact from the US-China trade war on demand from the European Union (EU). There is some impact on sourcing patterns, said Holst-Mikkelsen, as a number of companies seek to shift a part of their manufacturing elsewhere in general.

Asked whether Flexport has noticed any recent “pre no-deal Brexit” effect on ocean freight traffic, Holst-Mikkelsen said: “An increasing number of customers are addressing the fallout of Brexit by exploring and relocating their distribution centres in the UK, and by identifying different ways to serve the UK market from other parts of Europe.

He added: “We’re not seeing increased demand in the UK market at this time.”

On the probable effect on ocean trades when the IMO 2020 low sulphur fuel cap comes into force on 1 January, Flexport said that there is “significant uncertainty” in the market as to the impact on rates.

Added Holst-Mikkelsen: “Carriers initially attempted IMO 2020 implementation in early Q4 2019. It was then delayed until early December 2019 by a number of carriers, with some even pushing implementation to January 1 altogether.

“The market will determine new rates during November 2019, but there will need to be alignment on implementation and the effect on rates.”

As reported in Lloyd’s Loading List, in the lead up to China’s Golden Week, carriers were forced to drop prices to ensure ships sailed as full as possible, with the pre-empted rush ahead of the holiday period failing to materialise. As one major European carrier told Lloyd’s List, the “pre-Chinese Golden Week rush proved to be a no show”. As a result, spot rates, before factories brought down the shutters in the final week of September, slumped to their lowest level since May on the principal trades out of Asia.

Analysts Platts commented that the normal general rate increases one would expect at the front end of the month had been replaced with rate decreases, as carriers began “to compete for a limited number of cargoes leaving North Asia”.

Earlier this month, container shipping analyst Drewry further downgraded its ocean freight growth forecast for this year, as new global risks “heap more pressure on beleaguered container market”. Drewry noted: “The mood-music surrounding the container market has deteriorated further in the last three months, resulting in Drewry downgrading its outlook for world container port throughput for the current year and the rest of the five-year horizon in the Container Market Annual Review and Forecast 2019/20, recently published by Drewry Shipping Consultants.

Drewry now expects global port throughput to rise by 2.6% in 2019, down from the previous 3% expectation. This latest downgrade follows a previous lowering of its growth expectations in July to 3%, from its previous prediction of 3.9%, due to as trade and geopolitical tensions threatening a further slowing to global economic growth, and the regionalisation of manufacturing supply chains and environmental concerns adding further uncertainty.

Commenting on this latest downgrade, Simon Heaney, senior manager for container research at Drewry and editor of the Container Forecaster, said: “The weight of risks pressing down on the container market seems to be getting heavier by the day. The situation has been exacerbated by a brace of new problems that cloak the market in further layers of concern and uncertainty over those that previously existed.

“There is a danger that this stream of negative news creates a self-fulfilling prophecy that might run contrary to the facts on the ground. First-half port statistics were reasonably strong and consumer demand had been fairly resilient, all things considered; but some key indicators have more recently taken a sharp decline and we feel it is right to adopt a slightly more cautious attitude.”

One of the major risks identified in the report is the impact of IMO 2020 on containership supply, Drewry highlighted, noting: “There is still no clear guidance on just how much additional cost it will land on the industry and the recent drone attacks on Saudi oil facilities muddied the waters when it caused oil prices to spike.”

As reported in Lloyd’s Loading List, Flexport last week reported a “volume plateau” in Transpacific Eastbound (TPEB) ocean freight due to a “black swan” event – the absence of a peak season – caused by front-loading earlier in the season leading to higher inventory levels as well as less demand in the market, with some US sourcing shifting to southeast Asia.

Jan Hinz, Flexport’s senior director of US ocean freight, told Lloyd’s Loading List: “We are seeing volume plateau on the TPEB market, with supply continuing to outstrip demand and spot market rates trending below fixed contract rate levels.

“Ocean carriers are trying to balance supply and demand by implementing blank sailings to reduce capacity. This was implemented around the Golden Week holiday to help prevent further spot rate deterioration. Extensive blank sailing programmes have been announced for October and beyond.”

Asked about the effect of the US-China dispute on the key trade lane, Hinz said: “This year’s ‘black swan’ event for the TPEB has been the complete absence of a peak season. This can be attributed to front-loading earlier in the season, and consequently, higher inventory levels as well as less demand in the market.

“We have seen slow peak seasons pre-2018 due to shifting sourcing patterns, but not to this extent.”

On the question of whether the tariff row has affected the logistics strategy of either shippers or forwarders, Hinz indicated that air freight has seen more “front-loading” of inventory to beat tariff deadlines.

Said Hinz: “2018 was an exceptional year for ocean freight on the TPEB with a dramatic early peak season due to tariff hikes. The swift implementation of tariff hikes in 2019 made it impossible for shippers to allow for front-loading like we saw in Q4 (fourth quarter) 2018.

“Front-loading is less pronounced in ocean freight now, but we are still seeing it in air freight.”

Source: Lloyd’s