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Shippers face ‘transformation of rate conditions in container shipping’

Greater competitive concentration among ocean freight carriers combined with tighter capacity management discipline mean the recent exceptional freight rate levels on the transpacific could signal a sea-change in contract rate pricing.

Beneficial cargo owners (BCOs) should start to budget for higher contract rates on most routes in 2021, according to container shipping analysts Drewry, which believes the recent exceptional freight rate levels on the transpacific market could signal a sea-change in contract rate pricing.

The organisation noted that the recent “unprecedented” transpacific spot freight rates “signal that a transformation of the container shipping sector may be underway and that shippers need to adapt”, because of greater competitive concentration among ocean freight carriers, combined with tighter capacity management discipline.

Eye-watering rise

It highlighted that eastbound transpacific spot container freight rates “have not just increased a lot since the beginning of the COVID-19 outbreak; they now exceed previous historical highs by an eye-watering 40%”.

This week’s reading for the Drewry Hong Kong-Los Angeles spot freight rate benchmark ($/40ft container), the first spot rate index tracked in the container shipping industry, broke the $4,000 threshold and reached a 15-year high of $4,081 per 40ft container – more than double the long-term average price and $1,201/FEU higher than the record prior to 2020 ($2,880/FEU in 2012).

Drewry questioned how this was possible, and asked where are the anticipated benefits of the economies of scale and efficiencies achieved by carriers over the past 15 years, noting:

“As an independent consultant, bid management expert and provider of market insight for many years, we believe what we are witnessing is something beyond the usual dynamics of market supply and demand at work. True, Asian container shipments to the US are currently very strong, shippers are replenishing their inventories, there is a shortage of empty boxes in China, and some shipping capacity has been taken out by carriers through cancelled sailings.

Carrier concentration

“But the higher level of concentration in the ocean carrier industry, combined with new, tighter capacity management discipline among carriers are also behind these exceptional freight rate levels. Ocean carriers seem to have come to realise the opportunity presented by the COVID-19 crisis and that by managing capacity closely, they can manage prices with potency.”

It said these developments will be,

“concentrating the minds of shippers”, adding that regulators in China and the US were already watching the market closely to examine it for any potential breach of competition rules.

“Because spot rates tend to be leading indicators of contract rates, contract shippers/BCOs should start to budget for higher contract rates on most routes in 2021,” Drewry said. “With Asia-US West Coast spot rates currently at $4,000 vs 2020 contract rates typically closer to $1,500, is it possible that ocean carriers could set their 2021 contract rates at $2,000 or $2,500 or even $3,000 per 40ft container in their next tenders?”

To address current market issues and procurement strategy changes, Drewry stressed that it was supporting shippers/BCOs in several ways, including providing access to databases of spot rates on over 700 lanes and the opportunity for shippers to benchmark their contract rates against the Drewry Benchmarking Club rates of small, medium and large shippers – or,

“with the support of Drewry’s bid management experts, secure better results by employing best practices and the latest bid technology”.

Competition analysis

Meanwhile, in its latest Sunday Spotlight update, fellow container shipping analysts Sea-Intelligence this week analysed the competitive pressure among the top-10 container carriers, looking at the size, market share, relative market share, and the Herfindahl-Hirschman Index (HHI) – which measures the degree of market consolidation on a scale of 0 (perfect competition) to 10,000 (monopoly).

It compared three points in time – April 2017 which is when the “new” carrier alliance structure was formed; January 2020 which is right before the Coronavirus pandemic; and September 2020, which captures the present scenario.

“From a global perspective, the data shows a development wherein the relative competitive environment between the 10 largest carriers has strengthened,”

Sea-Intelligence CEO Alan Murphy said.

“This does not mean the global market overall has seen de-consolidation – it is very evident that the opposite has been the case for the past 20 years.

“However, what the data shows is that within the ‘elite’ group of the remaining 10 large global carriers, the relative landscape has flattened slightly – and therefore the competitive pressure has increased. In an environment wherein freight rates are clearly strengthening at an unprecedented pace, this conclusion might appear counter-intuitive, however the data is quite clear.”

Less risk of price wars

Murphy continued:

“The strengthened freight rate environment since January 2020 cannot be purely ascribed to a narrowing of the competitive pressure, because in terms of market share, we have de-facto seen the opposite. However, this does lend further strength to another analytical argument, namely that the reduction in the number of competitors, the increase in the number of weekly services controlled by any alliance/VSA, and the increased transparency in pricing, has led to an environment which reduces the risk for destructive price wars and rewards carriers for actively, and rapidly, managing demand fluctuations, by performing identically rapid capacity management.”

Explaining these factors further, Murphy told Lloyd’s Loading List:

“From a perspective of purely looking at market shares, then the relative size of the providers plays a significant role in determining the competitive pressure. As there are effectively only 10 global carriers left, it is relevant to just compare them to each other.

“If there are 10 providers, and they each have a market share of 10%, then you will have a much higher degree of competitive pressure, than a market where one carrier has 91% and the remaining 9 carriers have 1% each, everything else equal. This is what we mean when we say the relative landscape has flattened slightly.”

He concluded:

“It is, of course, important to note that the top-10 carriers have become very dominant, collectively, as the market consolidated; but between them, the competitive pressure has increased slightly since 2017.”

Source: Lloyds Loading List

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