A highly unpredictable market and elevated rate levels is giving Asia-Europe shippers an annual contracting headache.
Shippers on the Asia-Europe trades are approaching their traditional annual contract season with a growing lack of clarity over expected demand as rising economic uncertainty linked to the COVID-19 pandemic muddies the waters.
Indeed, there is little incentive for cargo owners with annual contracts ending in the fourth quarter to engage in carrier talks on new contracts for 2021 in the current sellers’ market as rates on trades from China to Europe remain at levels not seen in years.
Spot rates are highly correlated with long-term contract prices, and annual renewals from Oct. 1 are showing increases of up to 20 percent from the previous year’s agreements, according to data from Xeneta, a freight rate benchmarking and market analytics platform.
On top of the high spot rates, demand uncertainty for cargo owners is growing as a second wave of coronavirus disease 2019 (COVID-19) infections spreads across Europe and once again locks down entire cities. Further compounding the uncertain outlook are deteriorating economic outlooks for Europe that point to difficult trading conditions next year.
This wave of unpredictability is leaving shippers on the Asia-Europe trade with limited options, most of which involve trying to avoid going into carrier talks during the fourth quarter.
“Shippers will benefit from delaying the negotiating process, and although carriers will want to keep rates up, I don’t expect rates to rise past these current levels, as we are nearing the end of the Christmas shipping season,” Erik Devetak, chief product officer at Xeneta, told JOC.com.
Devetak explained that the correlation between spot and contract rates meant that it would take three to six months after the spot market declined for the falling short-term rate levels to find their way to the long-term market.
“So if you have a chance, don't go on the spot market because it is very high,” he said. “Even if you move to the spot market for a couple of months, you will still be paying 50 percent more than you were on contract. If you have the chance, try to prolong your contract rates for an additional few months until the market development becomes clearer. But it might be difficult to convince carriers with the spot market so high and capacity tight.”
Bigger shippers with large volumes may find carriers willing to extend their contracts at the same or slightly higher levels for a short period of time, but this option is unlikely to be available for smaller shippers.
Avoiding the spot market
The Asia-Europe spot market is not a place shippers want to spend too much time. Last week, the average China-North Europe spot rate was up 86 percent year over year, and 73 percent higher on China-Mediterranean routes, according to the Shanghai Containerized Freight Index (SCFI). The weekly rate movements are tracked at the JOC Shipping & Logistics Pricing Hub.
On the Xeneta platform, short-term contract rates from China’s main ports to North Europe as of Oct. 20 were at $1,167 per TEU, while long-term rates this week were at $888 per TEU.
Shippers that spoke with JOC.com expressed concern as their 12-month contracts neared the end dates, uncertain of the best course of action as they try to manage a lack of clarity on demand into 2021 with expectations that current high rate levels will decline through the fourth quarter.
“We will not put out a big global tender as we would normally do in November,” a shipper based in southern Europe told JOC.com. “Instead, we will try to close shorter-term contracts directly with the carriers, or extend our current long-term contract for a few more months, until the demand situation becomes clearer.”
A Germany-based Asia-North Europe shipper said he was unable to delay the contract talks until after Chinese New Year because all his contractual agreements have now ended and to meet customer demands, new contracts had to be ready by the end of November.
“It is unfortunate timing, but maybe we will look at reducing our contract exposure and focusing more on the spot market, for the time being, at least” he said.
The logistics head of a European food production group said its procurement strategy had to respond to the way the market was developing, which was increasingly volatile and erratic.
“I have been in ocean freight for 15 to 16 years and this is the most volatile I have seen it from a shippers’ perspective,” she said. “Prices are going up and service is going down, so why would you lock yourself into long-term contracts now? But if you don’t, you then need the internal capability to be able to keep on top of what is happening in the marketplace, to adapt your rates and change contracts to short term or long term, dependent on trade lanes. It’s a balancing act.”
The supply chain director for a supermarket retailer in Europe likewise said annual negotiations with carriers normally begin in December, but he plans to wait and see how the market develops. “So for the first quarter of 2021, we remain kind of relaxed pricewise,” he told JOC.com.
Traditional cargo flows upended
Seasonal demand patterns are also being heavily influenced by the COVID-19 pandemic. This point was made by Markus Blanka-Graff, CFO of Kuehne + Nagel, during the forwarder’s third quarter earnings call with analysts this week.
“We have not experienced our regular seasonality, I think the year 2020 has been bare of any regularities, so the seasonality that we have seen has been different or certainly distorted,” he said.
Most of the Christmas cargo should already be on the water, but despite the westbound Asia-Europe trade being deep into the Golden Week holidays, typically a time when volume slows before a Chinese New Year pick up, container demand continues to fill the available capacity. Carriers have reinstated most of the sailings cut earlier this year on the trade, with only 10 percent of sailings set to be blanked through Week 52, according to Sea-Intelligence Maritime Analysis.
The capacity management by carriers has paid off handsomely as container shipping companies head for a highly profitable year. Carriers have also been clear that they intend to continue flexing capacity up or down to match demand, which could see more disruption in store for shippers if the deteriorating economic outlooks are anything to go by.
The International Monetary Fund (IMF) last week cut its World Economic Outlook for 2021 by 2 percentage points, expecting the global economy to grow 5.2 percent after a 4.4 percent decline in 2020. In container volume terms, the latest IHS Markit GTA Forecasting report is for world containerized trade to grow 5.8 percent next year compared with 2020. However, that would still be a decline of 3.6 percent (5 million TEU) compared with the 147.9 million TEU transported in 2019.
IHS Markit warned that the forecasts should be treated with “a large degree of caution,” and noted that economic developments would critically depend on the shape of the COVID-19 infection curve, which could not be fully predicted at this stage.
“A strong second wave of the pandemic can lead to a double- or triple-hit scenario. The next three months will be crucial,” the report stated.
The United Nations Conference on Trade and Development (UNCTAD) expects the value of global trade to contract 7 to 9 percent this year compared with 2019, depending on how the COVID-19 pandemic evolves through the winter months.
“The uncertain course of the pandemic will continue aggravating trade prospects in the coming months,” UNCTAD secretary general Mukhisa Kituyi said in a global trade update published Wednesday. “Despite some green shoots, we can't rule out a slowdown in production in certain regions or sudden increases in restrictive policies.”
JOC — 22 Oct 2020