What Remedy Could There Be for Declining Freight Rates?

Drewry’s 2Q14 Container Forecaster highlights that there is a widening gap between the positive financiáis of the few carriers really focused on cutting costs and the rest of the top 20 lines, as they battle with the pressure of falling freight rates.

Drewry forecasts that once again, average freight rates will be lower than in the previous year.

The company estimates that on the headhaul transpacific trade alone, carriers have given away in the region of $1.25bn in annual revenue via the lower annual contracts they signed with Beneficial Cargo Owner clients in May.

They also signed new annual contracts on the Asia-Europe trade earlier in the year at levels of around $150-$200 per 40ft container lower than in 2013.

On the positive side, they may have secured base cargoes to fill their ships at a low price. But this puts more pressure on carriers to try and recover revenue from the spot market.

Drewry believes that volatility in the spot market will remain high this year.

While supply and demand remain key drivers of freight rates across all trades, those carriers cutting their costs are also better equipped to offer lower rates and in real terms they are in fact passing back these benefits to their customers.

Industry unit costs per teu are forecast to decline by 2.5% this year and strategies such as slow steaming, re-designing networks and buying bunkers in Russia are crucial to this, but carriers will struggle to make a profit since we are also forecasting unit revenues to decline by a similar amount.

The blocking of the P3 alliance by the Chinese authorities is also disappointing for the industry since it was an excellent opportunity to help stabilise the main trades in terms of capacity management and efficient use of assets.

That chance is now missed. A mature debate is required to help balance the benefits of higher economies of scale, alliance consolidation and the need to control an oligopoly of mega alliances.

According to Neil Dekker, Drewry’s director of container research, adequately matching supply and demand at the global level and on a consistent basis is simply beyond the industry.

“This is an industry where accurate volumes on many trade lanes are unknown– simply because there is no unified and agreed system of accounting,” he said.

 [mappress]
Press Release; July 2, 2014, Image: MSC