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Trans-Pacific container rates take market by surprise; industry players scramble


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Singapore — Trans-Pacific container freight rates scaled new heights over the past month, with multiple general rate increases (GRIs) taking spot rates to week after week of record highs.

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However, some key moves by authorities in the past week have tempered bullish expectations. Going forward, sources are divided in their expectations for the rest of the year.

At $3,800/FEU, the cost to ship from North Asia to West Coast North America is now almost triple what it was at the start of the year, when it was $1,350/FEU. For goods flowing from North Asia to East Coast North America, rates have also jumped, climbing 74% year to date to $4,350/FEU on Sept. 18.

"Imagine yourself as an importer in the US, with contracts and budgets. Even if those contracts don't take a GRI, everything outside does, which blows the budget out of proportion. So you've got major retailers, importers, scrambling for space and having to pay these big premiums. At what point does it stop?" said Jon Monroe, founder of Jon Monroe Consulting.

Pre-contracted container freight is typically unaffected by general rate increase announcements. However, the unexpected surge in demand for certain goods such as personal protective equipment due to the global coronavirus pandemic has resulted in firm demand for spot space, which is not pre-contracted and incurs GRIs.

According to local media reports, China summoned carriers on Sept. 11 to discuss measures to regulate the sharp rise in trans-Pacific rates, and advised them to cut back on blank sailings. On Sept. 18, the US Federal Maritime Commission said it would review the container market for possible non-competitive practices, increasing scrutiny of the three major global container alliances.

Container alliances, capacity management trends

Alliances currently comprise about 80% of the container market. When trading activity cooled with the start of the global pandemic, alliances were able to respond quickly. Alliances canceled more than 400 sailings this year, removing 10% of nominal twenty-foot equivalent units (TEU) capacity from active service, S&P Global Platts learned.

This active capacity management, along with higher freight rates and lower operational costs led major container shipping liners including Hapag Lloyd, AP Moller-Maersk, HMM and Ocean Network Express to post strong profit growth during the second quarter of 2020 despite an overall decline in volumes.

The shipping liner industry is projected to post a combined net profit of over $15 billion in 2020, compared with $6 billion in 2019, according to an analysis by Copenhagen-based SeaIntelligence Consulting.

According to the company's CEO, Lars Jensen, carriers will continue with strong capacity management going forward.

Meanwhile, the taut supply of container space has met with rising volumes being delivered into the US. West Coast North American container ports have experienced a surge in volumes in recent months. In August, the Port of Los Angeles saw an all-time high container volume of 961,833 TEUs, up 12% year on year, while container throughput at the Port of Long Beach, California, rose 9.3% year on year in August as the port maintained a surge in volumes at the start of peak shipping season.

"In August, demand for such goods as home improvement items and home exercise equipment contributed to the increase in shipments, along with another short-term increase in extra vessel visits that made up for voyages that were canceled earlier this year," said the Port of Long Beach.

Seasonal lull period in question

Typically, the container market cools down after the Chinese Golden Week holidays, which take place in early October. But sources are split on which direction freight rates will take this year.

"Everyone's wondering how much a lack of holiday cargo after Golden Week will affect rates. PPE, ecommerce and home commodities will continue to drive demand up. If that continues to rise while holiday cargo comes down, we'll see if it absorbs it and ends up being a wash," said a North American logistics specialist.

"Everyone I talked to — NVOCCs, BCOs, carrier executives — say the same thing, that this is going to be strong through the year. We see strength through to the end of the year," said Monroe.

Similarly, a source at a North Asian carrier said the company expects rates from North Asia to West Coast North America to be supported through to the end of October, with the possibility of maintaining all-time high levels even further into the fourth quarter.

Others, however, felt that freight rates might plateau.

"We've maybe seen the top of the market, and the tipping point. Rates will level, but not tank," said another North American logistics source.