News Letter – 20Cube Logistics (Australia Team)

  • July 12, 2019
  • News

Rush for spot contracts cause shipping chaos

The economic fallout of the Covid19 pandemic continues to wreak havoc in the global economy and the latest casualty is the shipping trade with carriers rushing to cash in on spiraling demand. As a result, schedules are being disrupted with contracted cargo shipments being given second preference ahead of spot bookings that fetch freight price premium.

According to industry publication The Loadstar, Asia-US demand continues to surge, and Beneficial Cargo Owners (BCOs) are struggling to ship contracted cargo. They are increasingly turning to Non-Vessel Owning Common Carriers (NVOCCs) to support fractured supply chains.

It seems carriers have become an unlikely beneficiary of the global health crisis. The Loadstar reports that carriers are finding bogus reasons to refuse the release of equipment at depots in China, in addition to rolling contracted containers without notice.

New ball game

“Carriers can get four times the price for a spot booking and, with a few exceptions, they are not worried about contracts anymore, as it will be a completely new ballgame next year. It’s a no-brainer really,” states a Shanghai-based forwarder speaking to The Loadstar.

Annual contracts on the Transpacific are usually negotiated through February and March, and shipping consultant Drewry said it expected early deals for 2021 concluded in excess of 40% higher than this year, “having seen the rate quotations of carriers for early transpac bids.”

Industry sources are already predicting that 2021 will be an uphill battle for shippers stating that it is now very much a sellers’ market. Another source noted that even the biggest BCOs were having trouble getting equipment and space when they had exceeded their minimum quantity commitments and were turning to NVOCCs to get their products shipped. BCOs are said to be looking for space wherever they could get it and it is coming from NVOCCs.

Volume growth

October volumes show NVOCC market share had grown by 47.5% indicating that carriers appear to be turning away from the stability of annual contracts on the route in favour of the more volatile spot business, although that could all change when demand drops.

Right now however there is no sign of the unprecedented demand spike coming to an end, with US ports recording record import volumes in October, with actuals for November and forecasts into December already well ahead of 2019 numbers.

According to data compiled by New York-based Blue Alpha Capital, imports through the top ten US container ports in October were up 18.8% compared to the same period last year.

Rough Seas

As we pass the midpoint of Q4, it is evident that this year is going to be chalked up as one of the most expensive years for ocean freight on almost any trade in the past decade. What has added to the woes for many exporters and importers has been the acute shortage of equipment that has developed in key export locations such as Thailand, India and China.

Anecdotally, several shipping line contacts have informed 20Cube Logistics that they do not see an easing of rates or space pressure until after the Chinese New year of 2021 (rather than the traditional demarcation point of 7-10 days before Christmas). For now, the market waits with bated breath for an indication of December’s FAK rates – particularly on the North Asia to Australia trade.

As anyone who has been following our regular broadcasts will know, in March and April of this year, two whole services that represent weekly sailings of up to 4,000 TEU each were removed out of service on the North Asia-Australia trade. This reduced capacity would be a welcome reprieve for the market right now but unfortunately, these services remain mothballed.

One interesting (but perhaps not surprising) development this year has been the fact that carriers have abandoned offering space on named accounts in favour of more lucrative spot bookings. What this means is that the shipping industry as a whole has identified an opportunity to manage capacity and keep rates high. As the inevitable difference between named account (NAC) rates and spot rates diverged to many multiples, shipping lines have prioritised space for spot bookings, naturally.

In certain instances, some space protection has been afforded for NACs, but a quick assessment by most NAC-holders would no doubt reveal that they are not getting anywhere near what they would have got space-wise compared to the peak season last year.

The heartache has intensified with lack of available empty equipment at main export locations. As spot and FAK bookings are being routinely prioritised, it is easy to understand how the relevant shipping orders (SOs) for those bookings also get released first in the lead up to a sailing. In an ever-dwindling equipment pool, NAC booking-holders that see their SOs released last often are met with a message from the empty park that there is no equipment for their exporters to collect.

20Cube Logistics is theorising that the abandonment of support of NACs is symptomatic of a broader trend. We see that there will be a period of upheaval throughout 2021 as many VOCCs (vessel-operating common carriers) rethink their tonnage mix and service offerings. This “2020 anomaly” will not just be a blip on the radar. The activity this year has demonstrated to the carriers that by restricting supply, higher rates can be maintained for longer, without a punctuated program of blank sailings.

The evidence seems clear. From the shipping lines’ perspective, they were putting too much supply into the works and not being rewarded with enough demand to keep rates high.

But, as a world we don’t seem to have an answer for the equipment problem. If the world’s trade imbalances continue, then containers are inevitably going to end up in import locations. The carriers will have to address this imbalance and attempt more regular repositioning. How this problem will be solved remains a mystery.

For 2021, we think that importers should be bracing for freight rates that do not experience the usual swing-low through the slack before a slow climb into the peak. Instead, the capacity management bug that the carriers all seem to have caught will likely mean freight remains high throughout the slack before moving higher again into the peak.

There is no crystal ball to aid the prognostication, but money talks.

We wish you all a very happy and prosperous 2021!

Kind regards,

Daniel Gillham

Customer Service Executive, QLD