Trade lane competition set to feature in 2021

Shippers should prepare themselves for greater competition between trade lanes in 2021, as global carriers capitalise on having the upper hand in upcoming contract negotiations.

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The spike in freight rates on the Asia-Europe trade this month (up 45% in a week according to the World Container Index published by Drewry) has brought the comparative cost per mile of the different trade lanes into the spotlight in recent weeks.

With spot rates between Asia and Europe previously trading at less than half the rate being charged between Asia and the US, the sharp correction this month has levelled out rate differentials on the world’s two most important trade lanes.

Boxes between Shanghai and Europe were trading for US$3,124/TEU this week according to the Shanghai Shipping Exchange, compared to US$3,900/TEU from Shanghai to the US west coast.

“Six deep-sea trades set new SCFI spot rate records. Again,” said Lars Jensen, chief executive of Danish consultancy Sea-Intelligence.  “Asia-North Europe rates are up 231% compared to the pre-Christmas week last year.

Asia-US East Coast appears to have now broken free from the Pacific “plateau” and have increased almost US$200/FFE in the past two weeks. Asia-East Coast South America became the first SCFI trade to exceed the US$6,000/TEU level and came in at US$6,256/TEU. An increase of 1,151% compared to July this year.”

Prior to this month’s sharp increases, US rates had been almost twice as high as those to Europe prompting the dilemma for lines of shifting tonnage to more profitable routes.

The closer alienation of rates on the principal trade lanes is going to be a feature of the industry in 2021, according to Nerijus Poskus vice-president, Global Ocean freight at Flexport.

“Another global trend in 2021 is competition is going to increase between the trade lanes,” he told Container News. “As the carriers manage supply and demand better the trade lane competition is going to increase severely.”

Shippers should be wary of large differentials between rates as this will lead to tonnage being relocated to serve the most profitable trade lanes, he said.

As the spotlight turns onto contract negotiations on the Transpacific in May, says Poskus, all eyes will be on spot rates and if they soften significantly after Chinese New Year.

“Something is different and that is capacity management. Carriers used to be notoriously bad and there was always over-capacity. The carriers really learned how to manage capacity so prices will remain higher,” he said. “Everybody has to pay elevated price levels if they are in contracted rates.”

“Everybody” means across the board, he said, and shippers should be prepared to pay similar rates on different trade lanes or risk carriers following the market and re-allocating tonnage to the most profitable routes.

“Carriers can set themselves up for huge contract gains next year if their contracts are signed and the spot rates are around US$4,000/FEU to the US west coast in March. If that is the case then they will make offers at that price or even higher. Supply and demand have shifted.

Spot rates used to act as a ceiling (in contract negotiations), this year it may be more of a floor.”