Spot Rates: Will They Follow the Year of the Dragon or Monkey?
That container spot rates have increased since the start of year should not be a surprise to anyone. In every year since Drewry launched the World Container Index (WCI) spot prices on the key East-West corridors have increased during the lead up to Chinese New Year (CNY), which lands in and around the end of January/mid-February. The shutdown of factories during festivities means that shippers front load cargoes ahead of time, causing a demand spike that lifts prices.
As of February 8, the composite benchmark rate for the WCI that covers eight major East-West trades, was $1,512 per 40-foot container, a rise of 25 percent on the year-end 2017 figure six weeks prior. Similar increases were seen in both of the previous two years six-weeks out from CNY.
For carriers, it is imperative to cash in during this boom period, because the crash on the other side of CNY can be equally, or even steeper than the rise was. It spells danger to carriers if, as happened in 2013 and 2015, there is only a minor uplift in rates, as there is a much lower a platform for rates to fall from.
In 2013 it wasn’t such a problem as the post-CNY nosedive was less pronounced than the preceding increase, but in 2015 (the year of the sheep) lines were hit bit the double-whammy of a weak build up to CNY, followed by a steep decline. It was an even worse scenario in 2016 (year of the Monkey) when after a reasonable pre-CNY boost of 24 percent, rates crashed by 41 percent afterwards.
In both 2015 and 2016 that meant that the WCI composite lost nearly 25 percent of its value when comparing six weeks before and after CNY. The rise and fall of rates during this time window is especially significant to the Transpacific market as the prevailing rate at the end of the period helps set the benchmark for annual contract negotiations.
Last year brought some respite for carriers as the pre-CNY gains exceeded the post-CNY lull, which meant that the prevailing rates six weeks after CNY was around $100 higher than it had been six weeks prior to the festivities, giving a reasonably stable platform for contract negotiations.
What then are the prospects for 2018? Will the spot market downslide be as severe as it was in 2016, or will the recent trend be overturned and further gains achieved as happened in 2012, or something in between?
To try and answer this we have looked at the supply and demand conditions in the first quarters of each year since the WCI started. For this purpose we are using Drewry’s Practical Market Index, as published in our Container Forecaster report, which measures available world capacity and demand with the former being adjusted for vessel lay ups. A figure of 100 equates to equilibrium.
What we see is that in 2012, when rates increased before and after CNY, the supply-demand balance was the in the best shape. That was largely achieved through significant capacity adjustments, when lines adopted a greater focus on restoring profitability by removing surplus tonnage in the Asia-Europe and Transpacific trades to support the market. Having dwindled beforehand, carriers reactivated the idle fleet, which jumped to nearly five percent of the total fleet in the first quarter of 2012.
Drewry’s Practical Market supply-demand index for the first quarter of 2018 is only a forecast, but we expect conditions to be on a par with 2016. Therefore we expect the WCI to follow a similar trajectory, meaning carriers are in for fairly steep price reductions immediately after CNY.
That is not to say that we expect spot rates for the full year to be down against 2017. In fact, we anticipate a small increase. While there is a lot of potential new tonnage due in 2018 (around two-million TEU after slippage from last year) we expect carriers to suppress their impact with more deferrals, scrapping and if necessary by reactivating the idle fleet, which is now below two percent. Moreover, void sailings will remain a key part of the arsenal to prevent trade load factors falling precipitously in any given month.
Rates are likely to fall sharply after Chinese New Year, but will strengthen thereafter. Carriers are likely to have to make greater use of the idle fleet to approach supply-demand equilibrium.