By Sara Mayes, CEO and President Gemini Shippers Group, January 5, 2016
2016 promises to be another interesting year for shipping on the Transpacific Trade. Many shippers enter the year wondering where freight rates and capacity will head. 2015 proved a volatile year with carriers and shippers experiencing wild swings in price and service due to the continued delivery of new ULCC container ships, port congestion on the West Coast in the first half of the year and declining short term rates driven by overcapacity on most of the East-West trades. Despite modest growth in the Pacific, lines had little relief beyond the continued decline in bunker prices and the hope of possible future benefits due to industry consolidation brought about by the merger of Cosco and China Shipping and the purchase of APL by CMA.
So, as we enter the 2016 contracting season, many shippers are wondering what to expect.
While it’s probably a bit early to know for sure, a couple of trends seem to be emerging.
New ship deliveries will continue in 2016. Carriers continue to order and receive new and larger ships at a faster pace than demand growth. The current global order book of 3.8 million teu represents 20% of the existing container fleet. 60% of these new builds (around 300 ships) are scheduled to be delivered in 2016 and 2017.
Fuel prices remain at recent lows. Bunker prices start 2016 at a ten-year low of around $140 per ton which is 49% less that the 2014 average price. This lower price benefits carriers with lower operational costs, the savings of which are often passed on to shippers in lower rates. Lower bunker prices also affect carriers’ decisions to lay up tonnage, with lower bunker prices lowering the threshold at which carriers reach a voyage cash burn position (and hence often cancel sailings).
Short term rates will continue to be volatile. Carriers will keep using spot rate pricing as a tool to fill ships, but shippers will continue to face wild swings in price and capacity availability when relying on the spot market.
Carriers will attempt to improve long term contract rates in May 2016. In November, the Transpacific Stabilization Agreement, which represents 90% of the capacity in the Pacific trade, noted that they would seek minimum rate guidelines for the May 1 contracting season. Like past years, it is safe to assume that these guidelines will come under pressure as the early bird bid season commences after Lunar New Year.
Intermodal rates and drayage continue to be problematic for both shippers and carriers. Carriers continue to struggle to provide adequate pricing and service levels for inland locations and door delivery service their preference for port to port cargo and the uncertainty of container imbalances costs driven by a poor westbound market.
Alliance changes are not imminent but are on the horizon. The merger of Cosco and China Shipping and the eventual takeover of APL by CMA will lead to an alliance reshuffle in the future. While Cosco and China Shipping have not yet indicated where they will go, CMA has said that their future with APL lies in the O3 group, hence future change for the G6, O3 and CKYHE alliances is likely.
With modest demand growth expected in 2016, it looks like rates will remain under pressure as we enter into the 2016 contracting season; but, as we have learned from the past, in liner shipping, the only constant is change.