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Container Insight Weekly
Container Insight Weekly

Capacity cuts help turn freight rate tide

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Moves by carriers to reduce capacity in the weak Asia-East Coast South America trade saw freight rates jump by over 50% in March.

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The famous quip about Brazil being the country of the future, as it always will be, rings even more true today. Last week the Brazilian Congress voted overwhelmingly to impeach President Dilma Rousseff for her role in the Petrobas scandal, while the Senate could yet remove her from office. Rousseff is not the only politician accused of wrong-doing as about 60% of congressmen – the same people who voted for her impeachment – also stand accused of criminality of various kinds.

 

There seems little hope that the incumbent political classes have what it takes to get the country back to the boom times of just a few years ago when it was famously heralded as one of fast-growing BRIC economies selling vast quantities of raw materials and commodities to China, and establishing its own high-tech industries.

 

A variety of factors have thrown the country way off course, one of which is that China has severely cut back its intake of Brazil’s raw materials and global commodity prices have fallen as demand peters out. According to the International Monetary Fund (IMF) Brazil’s GDP contracted by 3.8% last year, and will do so again in 2016 according its latest forecast, representing a 0.3 point downgrade from its previous assessment given in January.

Figure 1 Southbound Asia to ECSA Container Traffic ('000 teu)

Figure 1 Southbound Asia to ECSA Container Traffic ('000 teu)

Source: Drewry Maritime Research

The ever-diminishing container imports from Asia provide further evidence of Brazil’s sad decline. Datamar statistics show that Asia to Brazil volumes fell by 37.3% year-on-year in February, a woeful rate that was actually marginally better than in any of the previous three months. At this rate the inbound Brazil trade will be lucky to repeat the annual decline of 14.5% seen in 2015. At present the rolling 12-month average stands at a miserable -21%.

 

Traffic from Asia to the Plate region of Argentina and Uruguay is faring much better. Plate imports currently account for some 37% of all Asia-ECSA southbound flows, up from the low-20% share at the start of 2015. Measures enacted by Argentina’s new government, including relaxing foreign exchange controls, seem to be working as Plate imports grew for first time in four months in February, rising 4.1% year-on-year. The rolling 12-month average for Plate imports rose to 7.1% on the back of February’s import spurt.

 

Due to the continued, albeit shrinking, dominance of the Brazil markets the total Asia-ECSA shipments were still tracking way down at -26.5% Y/Y in February, while the 12-month average is -14.1%. For the whole of 2015 the annual southbound deficit was -9.5%.

Figure 2 12-Month Rolling Average of Eastbound Asia to ECSA Container Traffic

Figure 2 12-Month Rolling Average of Eastbound Asia to ECSA Container Traffic

Source: Drewry Maritime Research

More positively, exports out of Brazil to Asia (and to Europe) started to power ahead by some 20% since December, helped by the lower Real and renewed demand for traditional cargoes such as coffee, sugar, soybeans and tobacco. Strangely, at the same time, outward shipments from the much smaller-volume Plate region slid backwards despite the fact that Argentine’s new president Mauricio Macri devalued the currency in December as part of his business-orientated approach to restore growth. The Buenos Aires government also announced it would be eliminating export duties on agricultural products and industrial goods, which were as high as 35%, suggesting the downwards trend might be short-lived.

Figure 3 Southbound Asia to ECSA Capacity ('000 teu)

Figure 3 Southbound Asia to ECSA Capacity ('000 teu)

Source: Drewry Maritime Research

Following the suspension of the joint NHX service (12 x 4,250 teu ships) operated by NYK, PIL, HMM, K Line and Yang Ming at the end of September; other carriers have belatedly taken the same course of action. Maersk, MSC and MOL pulled their joint Sentosa/CSW service in February, operated by 5,500 teu vessels and shortly afterwards the CMA CGM/Hapag-Lloyd/Hamburg Süd consortium decided to convert its weekly ASE1/NX1/Loop1 service (now 6 x 8,600 teu) to fortnightly.

 

Alongside that fortnightly loop there are now only three weekly Asia-ECSA services, and the monthly southbound slot provision as of March was around 30% lower than it was at its 2015 peak in July and August.

Figure 4 Southbound Asia to ECSA Utilisation v Rates

Figure 4 Southbound Asia to ECSA Utilisation v Rates

Source: Drewry Maritime Research

At present we do not know what impact the reduced capacity had on average ship utilisation in March but judging from the uptick in freight rates it was positive. Drewry’s Container Freight Rate Insight reported that Shanghai to Santos spot rates increased by 51% in March against the previous month to reach $1,010 per 40ft container, their highest since September of last year.

 

There is still a long way to go before spot rates recover to the levels seen in 2014 when rates were four times as high but the latest pricing increase should be enough to encourage carriers to stick on the same capacity management path.

Table 1 Asia-ECSA - Estimated Monthly Supply/Demand Position

Table 1 Asia-ECSA - Estimated Monthly Supply/Demand Position

Source: Drewry Maritime Research

Our View

The improvement in spot rates seen in March should be repeated in the coming months as long as carriers don’t forget themselves and rush capacity back in. With so few services left in the trade there is little room to cut more, apart from via void sailings. We expect this practise to grow as southbound demand will be patchy at best.

Industry in a glance

World Container Index

East-West composite (US$/feu)

IFO 380 Bunker Prices

Rotterdam (USD$ per tonne)

Global Port Throughput

Jan 2008 = 100

Idle Capacity

(teu)