As a result of the wheels coming off Hanjin mid last year I wrote a piece on August 31st 2016 that rates were going to go up and they did. The article can be reviewed at https://www.linkedin.com/pulse/hanjin-falls-down-rates-shoot-up-tom-o-malley?trk=mp-reader-card for a refresher. The writing on the wall was pretty clear. I was stating the obvious. Real live capacity was suddenly removed from the market during the busy season and remaining carriers were bound to use the Hanjin collapse to create market uncertainty.
Now I am back revisiting the subject to say just the opposite as the New Year starts. If you are all ready to negotiate your yearly shipping rates, you may want to hold off if you can. Rates are bound to get downward pressure after getting an upward jolt in the second half of 2016. Now the busy season and uncertainty are history.
Moreover, the same problems that drove rates down before Hanjin tanked are still there. In a nutshell, there are too many vessels still in the water. No matter who buys who and regardless of how ‘fancy’ the lines get with vessel sharing (alliances), there is still too much capacity for rates to stay at their current level. To go even further, there is even chance the very tool being used by the lines to save money may blow up in their face. The new alliances will be eager to grab market share to benefit from the tactic of joining forces. It may have the effect of triggering a price war. Thanks to http://under30ceo.com/alone-secret-alliances/ for the picture.
When will the rates start giving in to downward pressure? Beats me, I’m a cargo insurance geek. I can tell you how much cargo insurance costs. Although I would think in the first quarter you will see signs of deflating rates. Much depends on factory orders directed at China. If the world suddenly becomes drunk with confidence and starts expanding production orders, lower rates may take longer to come, but they will come. Bad fundamentals in the ocean carrier’s world will make maintaining higher rates very difficult.
All of the vessels ordered by the lines, before what was thought to be an upcoming growth period, cost money and are still in the fleet. As a group they will find it very challenging to take vessels out of service to lower capacity and there are very few rust buckets left to send to scrap. The newer fleets are nowhere near depreciated enough to give much flexibility and most lines are not flush with enough cash to be cavalier about it. Rock, I would like to introduce you to Hard Place, I see you have both already met the world’s container carriers. Thanks to http://abcnews.go.com/Business/travelers-choosing-cargo-ships-cruise-ships/story?id=34824006 for the picture.
For the major lines it has to be asked if there will be desire to move to more use of post-Panamax mega vessels with lesser port calls? Economies of scale will help the lines tackle falling rates using post Panamax vessels. The lines would be able to have lower rates and not get upside down on shipments to major ports. Shippers choosing to book freight on smaller vessels that call non deep water ports for inland reasons would pay for the privilege. For many major world ports this would be a neutral impact. For U.S. ports it could be problematic.
U.S. ports have found it harder turn around maga vessels as well as some other world ports. Being a bit behind on automation and vulnerability to union disputes has put U.S. ports at a disadvantage when it comes to handling the ‘biggie’ vessels. Even if the ports can somehow off load the huge container vessels at lighting speed, the current down channel mechanics of clearing the containers and moving them inland would create its own congestion. U.S. ports already have struggles with congestion at times. Adding more Triple E vessels to U.S. ports may prove troublesome. Thanks to http://www.maersk.com/en/hardware/triple-e for the picture.
No matter how 2017 unfolds, it won’t be short on interesting problems and solutions. I believe rates will begin the journey down around February and it will be a long spring and summer for the lines. Of course I will be able to give you a spot on prediction in regard to spring and summer of 2017 by the time it’s fall 2017. I have a Masters Degree in Retrospect which makes me smart like that.