On January 1, the Trans-Pacific Eastbound (TPEB) market saw a general rate increase (GRI) take effect, following months of plunging rate levels. On January 4, the Shanghai Containerized Freight Index (SCFI) posted figures that showed week over week increases of 98% on West Coast rates and 77% on East Coast rates. At the same time last year, the market experienced upward trends, and carrier rate levels into the West Coast were roughly 27% higher than current rates. With nine GRIs announced by carriers since January 2015 making a big impact on the market, it’s important to understand why the increases happened and how the upcoming Chinese New Year plays a role.
The overall effectiveness of GRIs mainly stem from carrier utilization and market capacity. As carriers’ space utilization climbs—which typically occurs during peak season and prior to the Chinese New Year—the chance of a GRI sticking is more likely. Conversely, as carriers’ volumes decrease, so do the utilization levels—if all else remains constant—and carriers reluctantly reduce rates in order to drum up business. This reduction takes a toll on carriers’ overall profitability, so GRIs are announced in order to add stability.
Carrier utilization ran high in early 2015, and although volumes remained relatively strong year over year, the addition of capacity into the marketplace led to falling utilization levels. As reported by Alphaliner, the containership fleet grew 8.5% in 2015, accounting for the addition of 1.72 million TEUs to the global market—and only 200,000 TEUs removed through scrapping or vessel conversion. Even though the market took a negative turn following Chinese New Year 2015, carriers remained optimistic and ordered 255 new containerships, 60 of which fall into the 18,000–22,000 TEU group. This attraction for mega-ships can lead to overcapacity and could keep carriers working to match capacity and demand, thus continuing the overall volatility of the spot market.
Carriers are going to need to manage this oversupply. The idle ship capacity soared from 230,000 TEUs at the beginning of 2015 to 1.36 million TEUs by December. The unused fleet was expected to top the all-time high of 1.5 million TEUs recorded in December 2009—however, there was a surge in scrapping older tonnage to keep that from coming into fruition. That high, although painful for most in the shipping industry, ultimately resulted in increased utilization levels and GRI effectiveness.
After Chinese New Year 2015, rates began to fall as normal and the market dropped 28% from February through May. The problem was that volumes were not rebounding, and rates fell another 14% from May through July. Because the International Longshore and Warehouse Union (ILWU) and Pacific Maritime Association (PMA) didn’t reach an agreement until February 2015, most of the beneficial cargo owners (BCOs) had moved their volumes ahead of the peak season in order to avoid possible delays at the port. So the normal uptick in volumes never came to market, keeping carrier utilization at relatively low levels. Despite August showing a slight growth of 17%, the market continued to slide, falling 31% from August to November.
The biggest holiday in China—Chinese New Year—is right around the corner, and shippers worked hard to get their goods moved before factories closed. Without an increase in volumes following the holiday, it’s possible we won’t see any reduction to idle fleet until April. Carriers are optimistic that strong forecasting from their BCO customers will likely lead to higher utilizations and rate levels. Historically, however, volumes diminish following the Chinese New Year; with the overcapacity in the market, we could see the continuance of rate volatility. Whether you are looking at the glass as half empty or half full, only time will truly tell what this upcoming year holds.