East-West rates sharp slump reveals rising volatility in container
EAST-west trade freight rates have fallen dramatically since the beginning of the year, but are still firmly above the lows of 2011 and 2009, according to data released by Drewry Maritime Research.
In a recent webinar presentation by the maritime consultancy group entitled "Are you confused by ever changing freight rates" Drewry revealed that freight rates across all east-west trades today stand at a collective index reading of roughly US$2,000 per FEU.
This figure is well down from the estimated $2,600 per FEU recorded at the beginning of the year, as shown in the graph below...
click image to enlarge
We can also see that the peak rate over the course of the period covered was close to $3,200 per FEU in mid 2010. This is a full 60 per cent higher than the average east-west rate today.
For Drewry, its analysts argue that freight rate volatility has increased in recent years, which is really saying something when one considers how volatile rates have been historically in the container shipping industry.
Back in 2006 Hong Kong Shipping Gazette conducted a study on the volatility in freight rates, on both the transpacific and Asia-Europe trades between 1994 and 2005. Our conclusion back then was that rates over that 12-year period were somewhat volatile on the transpacific and very volatile on the Asia-Europe trade.
Examples of volatility on the Asia-Europe trade included a rate slide of roughly $600 per TEU between the third quarter of 2000 and early 2002. Essentially, the average freight rate continued dropping quarter after quarter for over one year.
It then rose by just under $600 per TEU between early 2002 through to mid 2003. On the transpacific it was a similar story, yet the transpacific rates never dipped as low as those on the Asia-Europe trade.
What we see in Drewry's chart for the east-west trades combined today is far more volatile. Whereas rates previously would rise and fall by $600 per TEU over the course of a year before beginning to change direction again, today rates can change by as much as $2,000 per FEU (or $1,000 per TEU) over a similar and often shorter time frame.
Drewry's analysts believe that the increased volatility in rates today, which at its most dramatic saw a trough of $1,300 per FEU and a peak of $3,200 per FEU between 2009 and 2010, has come about due to three primary reasons.
The first is the uncertain macroeconomic and geopolitical environment. The second is a result of the upsizing efforts of carriers to acquire larger and larger vessels, which has had a profound impact on the market's supply and demand fundamentals.
Lastly, the group's analysts argue that a change in the market behaviour of carriers is also to blame.
Due to these reasons, Drewry also believes that freight rate volatility will continue to feature as a staple of the container shipping industry going forward.
This is a fact that is hard to argue with. Just recently Hong Kong Shipping Gazette spoke with SeaIntel Maritime Intelligence senior consultant Thorsten Boeck, who told us he believed that the average cycle times of the industry were getting shorter and shorter.
Mr Boeck said that when he first came into the shipping industry the cycles occurred over a seven-year period. In recent years these cycles have shorted to three years, then two years and now even shorter.
"In 2012 alone we saw a peak and a bottom. We believe that the volatility is driven by overcapacity and as this gap widens in the coming years, we see that those cycles will become even shorter. Perhaps we will start having two peaks within the same year in 2013," he said.
It is difficult to imagine that the industry can continue indefinitely like this, as it may prove far too turbulent not just for the service provides, but their customers as well.
We can already see now with the most recent round of rate increase announcements on the Asia-Europe trade that some carriers are already trying to undercut their competitors, which could result in yet another rate war.
The sad fact of the matter is this. Some shipping lines can afford to suffer losses more than others. And it may be all too tempting for these lines to try and price their competitors out of the market, particularly those lines that have already been able to reduce their average unit costs through the acquisition of larger vessels.
Given the increasing volatility in the industry with regards to freight rates, particularly on the main line trades, the temptation to reduce competition in the longer term may be all too attractive for some.
One would hope that it does not come to that.
