Higher Freight Rates in Ocean and Air Markets Persist for Now

October 26, 2018
By Rich Roche

Higher Rates MGL

It has been a challenging peak season this year with spiking freight rates and space shortages in trans-Pacific trade. We may still have a way to go before we see much of a downturn.

Major drivers are:

  • Heavy rationalization of ocean carriers yields fewer owner representatives in trans-Pacific trade (roughly 3 owners per alliance now)
  • Trade wars with China causing front-end loading spike in pre-tariff shipping (with new rush to make entry prior to January 1, 2019)
  • Better capacity management across fewer ocean carriers resulting in less available supply for increased demand (4 vessel strings removed)
  • New-found agility of ocean carriers to implement void sailings and limit extra-loaders is pressuring the spot rates to remain at five-year high levels
  • Air freight capacity tight, matched closely with demand

As we hit mid-October, there seems to be no end in sight for overbooked vessels as front-end loading continues to be the driver of substantial volume. With most of the traditional peak season volumes now being delivered, the bulk of demand seems to be tariff related. Cargo that can be entered into commerce prior to January 1, 2019 will avoid the next round of 25 percent increases, so demand is high for the near future.

Void sailings continue to be announced (with ample notice) which means the carriers are actively forecasting demand and making space adjustments accordingly. While we anticipate a possible drop-off in new bookings by mid-December, the pre-Chinese New Year rush (though possibly weaker this year because of front-loading) will still see a surge in bookings of non-tariff goods that are trying to beat void sailings and factory shutdowns typical of that annual holiday. Carriers will retain their position of strength at least through February. Freight rates will continue to be volatile but will remain mostly on the higher side of average. A return to this year’s historic lows is unlikely.

Air Freight Costs

Air carriers on the other hand seem to be confident of their abilities to handle the front-loading prior to the new year as they have seen the recent return of some capacity. Some areas will be tighter than others, particularly as the new iPhone orders are getting underway from China. The spike in demand may just be starting, however, as traditional peak season for air increases during the next month or so.

Dark Cloud on the Horizon

We are a little more than a year away from implementation of the International Maritime Organization’s Low Sulphur Fuel mandates. Ocean carriers are already planning how to recover some additional $5 billion or more in annual costs. The mandate will be effective on January 1, 2020, with new requirements that reduce sulphur emissions from 3.5 percent to 0.5 percent for all cargo vessels.

There are several ways the carriers might go to comply with this new law. They can either:

  1. refuel their ships with LNG fuel (unlikely for older vessels)
  2. use scrubbers to clean exhaust gasses to the acceptable amount
  3. buy low sulphur fuel (most commonly) at an increased cost up to 50 percent higher than they spend today for regular fuel

Any of these solutions will come at higher costs which is estimated to be about $5 billion across the trades. As carriers will look to mitigate the costs, their options are not great for consumers. It is speculated that we will see a return to slow steaming in order to burn less of the more expensive fuels. It is also contemplated that a reduction in the number of port calls in each rotation will save actual miles traveled and, therefore, burn less fuel.

Once these measures are decided upon, new BAF (fuel) formulas are likely to be introduced that give transparency to how the new low-sulphur fuel costs will be billed. Each carrier may create their own version of this resulting in charges that will vary from carrier to carrier. In fact, four carriers have already done so with their first attempts to get in front of the market. It is speculated that the impact of higher fuel costs will equate to more than $500 per 40’ container when this begins in January of 2020.

Rich Roche is Vice President, International Transportation for Mohawk Global Logistics. Click here to read more about Rich.

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