Ocean Cargo Rates to Remain Jumpy, Say Analysts

Martin Dixon, research manager, Drewry Supply Chain Advisors, shares his observations on the current state of ocean cargo in this exclusive interview with Supply Chain Management Review.

Supply Chain Management Review: Should shippers expect more or less rate volatility this year?

Martin Dixon: Drewry is expecting the recent spate of freight rate volatility to continue. We are forecasting that the trade will not return to supply-demand equilibrium until 2017 at the earliest. In the meantime carriers will continue to be challenged by overcapacity and so are expected to prolong their well-tried practice of skipped sailings and frequent GRIs in an attempt to prevent freight rate erosion. Hence the market will remain highly volatile for some time to come.

SCMR: Which lanes will be the most problematic?

Dixon: Freight rate volatility will continue to be most noticeable on the westbound Asia-Europe trade, where a majority of cargo is moving on short term forwarder contracts (i.e. the spot market). We expect less volatility on the eastbound transpacific where the majority of cargo still moves on longer term BCO contracts negotiated directly with the carriers.

SCMR: Will carriers be better at managing capacity?

Dixon: Carriers have proven more disciplined recently with their capacity deployment at a trade route level. Throughout much of 2014 load factors remained relatively high on the main headhaul East-West trades, and we expect this practice to continue. However, with a large number of ULVCs due to enter the trade in 2015 carriers will be challenged to maintain this discipline and we expect North-South trades (those serving Latin America, Africa and Oceania) to be impacted by further cascading of vessel capacity and pressure on freight rates.

SCMR: Will there be a shift away from U.S. West Coast ports as a consequence of labor disruptions?
Dixon: Longer term we expect more shippers to consider options to protect against future risk of labour disruption and this is likely to lead to some shift to East Coast ports and Pacific North West ports north of the border.

SCMR: Port congestion is costing shippers more. Do we see an end to that?

Dixon: In the short term (i.e. throughout 2015) we expect US port congestion to remain an issue with cost implications for shippers. While we expect labour issues to resolve themselves with time, the deployment of ever larger vessels, chassis shortages and intermodal network service problems will continue to create landside congestion issues for ports. These issues will take some time to resolve.

SCMR: Finally, any more carrier alliances pending?

Dixon: Drewry is not aware of any particular pending alliance developments. But we expect alliance consolidation to feature more and more over the next few years, as carriers seek to combine traffic volumes to leverage economies of scale benefits of ULVC ship deployments. Unit cost leadership will be a critical competitive advantage for carriers and further alliance consolidation is the primary means to achieving this objective.

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