Is There a General Rate Increase in My Future?

December 9, 2015
By Rich Roche

Container ships at sea

* Ocean rates at record low
* Increases proposed for Jan 1

Ocean carriers in the Trans-Pacific trade started off 2015 with a bang, offering some of the highest rates to ever move cargo from Asia to the U.S. Since then we’ve seen a steady erosion of freight rates (more than 60%) to what might be a new record low. The causes of this slide are interwoven in supply and demand issues, among other influences.

About nine years ago ocean carriers began an epic building program, constructing a new breed of ultra-large container ships that would span trades across the globe. During this time, vessel sizes grew from 8,000 to 18,000 TEU (Twenty-foot Equivalent Units). These behemoths were designed to offer the best economies of scale, particularly when world fuel prices were at an all-time high. The largest of these container ships have been adopted across the Asia to Europe trades, shifting the smaller vessels from these lanes to ones serving U.S. ports of call. This sudden influx of ships has bolstered U.S. capacity—well beyond current demand—and is the primary driver of today’s lower rates.

We’ve been here before

With a lackluster peak season now behind us, carriers are withdrawing vessel strings for their annual winter deployment programs. During this time, some vessels undergo routine maintenance, while others simply sit at anchor. Currently the amount of capacity laid up is only eight percent away from the record numbers of 2009-2010. As history has a habit of repeating itself, we must be ready for freight rates to bottom-out and then quickly rebound.

Much like we saw in 2010, carriers are once again attempting a multi-pronged rate increase program. Part one of their plan–to institute a minimum rate program by 12/1—never materialized. By comparison, part two—which includes a $1200 increase for 40’ containers going to the U.S. West Coast and a $1600 increase for those to the East Coast, effective 1/1—seems to have more support among the carriers. If all goes according to plan, carriers plan to establish minimum rates by lane as we head into contract renewals in May.

Shipper’s outlook for 2016

We will soon see if the steamship lines can keep solidarity on the increases they’ve proposed. Despite all the backpedaling they’ve done in previous months, there is no reason to believe that the carriers won’t go through with the rates as announced. Our recommendation is to plan for the worst and assume that the latest increases will stick. Should that happen, we believe they will only be sustainable for a short period, until the forces of high capacity and low demand bring them back into check. According to our projections, 2016 will be another year of low rates for the trade.

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