Upside down: Asia-to-Oceania rates rise but volumes fall

A conceptualization of logistics trade routes to / from Oceania and Asia

Spot market freight rates on the southbound Asia-Oceania trade lane are defying the laws of economics as rates are rising but volumes are falling, according to new insights from maritime analyst Drewry.

Declining ocean volumes

Volumes have declined for four consecutive quarters on the Asia-to-Oceania route, according to data derived from Container Trade Statistics. This last occurred in the early part of the decade.

Year-to-date volumes to Oceania from Northeast Asia have fallen by 5.3% and from Southeast Asia by 6.2%. Container volumes into Australia, which covers 84% of the trade (the rest mostly to New Zealand), have fallen by 7%, Drewry said.

Drewry attributed the fall in volumes to a “sluggish” Australian economy, noting that there has been “weak spending growth in the household sector.”

Australia’s economy

According to Peter Martin, visiting fellow at the Crawford School of Public Policy at the Australian National University, the Australian economy barely grew this year. In the quarter ending March this year, the economy grew by 0.5%. In the quarter ending June this year, the economy grew by 0.6%. And for the quarter ending September this year, the economy grew 0.4%.

Over the year to September, the Australian economy grew 1.7% “well short of the budget forecasts, which in year average terms were 2.25% for 2018-19 and 2.75% for 2019-20”, Martin writes. The 10 year average is about 2.6%. 

And that’s important for maritime trade because, as shown by Martin Stopford in his book “Maritime Economics,” gross domestic product is highly positively correlated with the volume of maritime trade — the higher the levels of gross domestic product country then higher the volumes of trade.

Meanwhile, real household spending grew by 0.1% in the July-to-September quarter and, over the year to September, inflation-adjusted spending grew by 1.6%, “meaning [that] the volume of goods and services bought per person went backwards,” Martin said.

It’s true. Seasonally adjusted retail figures from the Australian Bureau of Statistics show that the percentage change from June to September quarters of “turnover in volume terms” went marginally backward with a figure of minus 0.1% recorded.

One of the main reasons for the slowdown in consumer spending is that wages in Australia are stagnating. Annual wage growth in total hourly rates of pay (excluding bonuses) in June was about 2.3%. In mid-2012, that figure was close to 4%, according to the Australian Bureau of Statistics. Obviously, higher wages should (barring a huge surge in costs) translate into higher disposable income. Conversely, lower wages should (barring a huge fall in costs) translate into lower disposable income.

Attempts at stimulus

Meanwhile, Australia’s federal government tried to boost spending by making tax cuts, delivered in the form of a tax rebate (i.e., actual cash in the taxpayer’s pocket), from July 1 onward.

Drewry said it “remains to be seen” whether the tax cuts to stimulate consumer spending will translate into imports from Asia. But the signs don’t look good for that scenario.

According to Martin, by the end of November, the Australian Taxation Office had issued more than 8.8 million tax refunds totaling A$25 billion (just over $17 billion).

“Instead of being largely spent, they were mostly saved, pushing up the household saving ratio from 2.7% to 4.8%, its highest point in more than two years,” Martin wrote.

Meanwhile, the Reserve Bank of Australia has announced it will begin quantitative easing as the overnight cash rate (the rate of interest that banks pay each other overnight) approaches 0.25%. Eight years ago the cash rate was 4.5% and now it is about 0.75%.

Quantitative easing happens when a central bank, here the Reserve Bank of Australia, buys existing government bonds. That tends to push asset prices up, force interest rates down (thereby lessening the burden on companies and households with large debts such as working capital overdrafts and mortgages) and, in theory, should encourage people and companies to borrow more money as debt becomes cheaper. The hope is that they will invest and buy more.

Meanwhile, as previously reported in FreightWaves’ Down Under Trucking, the Australian government has announced that it will bring forward A$3.8 billion ($2.6 billion) of infrastructure investment.

An intriguing anomaly: freight rates rise despite fall in volumes

Although the fundamental of the Asia-Oceania trade (i.e., Australia’s domestic economy) is weakening, Drewry has noticed an intriguing anomaly.

“Curiously, while container demand has ebbed away for most of the year, freight rates — at least from Northeast Asia — have actually taken the opposite path since June. Drewry’s Container Freight Rate Insight reports that average 40-foot container prices from Shanghai to Melbourne have nearly trebled over the course of seven months, rising from $1,090 in May to $2,800 in November,” the maritime analyst writes.

Drewry attributed the November peak (the highest since February 2018) partly to the introduction of IMO 2020-related emergency bunker fuel surcharges and also to increased port handling fees by container terminal operators, which FreightWaves has extensively reported on.

Reduced supply of container slots drove rates higher

However, it appears that higher freight rates on the north Asia-Oceania corridor have been caused by a reduction in the supply of marine carriage. Maersk, Hamburg Sud and MSC suspended one of their loops earlier in the year, which cut capacity by four ships of 5,000 twenty-foot equivalent units (TEUs).

Although a rival consortium (HMM, APL and Evergreen) later added capacity back to the trade, Drewry reports that “the total number of slots available to the market was still lower than in March thanks to other service rationalisations and void sailings … fewer slots countered the demand lull and pushed Northeast Asia-to-Oceania ship utilisation up from around 60% in March to just over 80% in October.”

Southeast Asia was different

Rates from Southeast Asia to Oceania have not experienced the same upswing because a consortium of shipping lines has added seven ships of 8,500 TEUs and six ships of 5,700 TEUs into the trade (although Maersk took a large amount of capacity away from Southeast Asia when it rededicated it to the Northeast Asia trade).

Drewry reported that slot capacity from Southeast Asia to Oceania in November rose by 11% in October.

“Unsurprisingly, spot rates ex [Southeast] Asia have not had the same impetus as from [Northeast] Asia with Singapore-to-Melbourne spot rates currently only around $1,500/40-foot, according to Drewry’s Container Freight Rate Insight, which is roughly $200 down on where they were at the start of the year,” the maritime analyst concluded.