SeaIntel: Cascading of Larger Ships Hurting Asia-ECSA Rates

Image Courtesy: BSM

Cascading of larger ships into the Asia-East Coast of South America (ECSA) trade lane has seen spot rates drop from 3,800 USD/TEU to 2,200 USD/TEU in just 11 weeks, data from SeaIntel shows.

As indicated, in April 2017, the weekly capacity on the trade lane reached a low point at 23,500 TEU offered in the market, and shortly thereafter rates spiked at almost 4,000 USD/TEU. Having maintained capacity discipline for a full year, carriers have begun to inject capacity in the trade lane, presumably to take advantage of the high rates, primarily through the deployment of extra loader vessels. Since April 2017, capacity in the trade lane has grown by 30% – in turn driving the sharp rate reductions recently.

The Asia-ECSA trade lane has been subject to extreme swings in spot rates from 2012 onwards, with a very marked rally in rates in spring 2016, even stronger spike in summer 2017. The decline in the trade lane in the period 2013-2016 was triggered by the cascading of larger vessels into the trade. The carriers reduced the capacity in late 2015 through the cancellation of three of the existing six services.

At the height of the overcapacity period, spot rates dropped to as little as 99 USD/TEU in February 2016, on what is arguably one of the longest and costliest trades to service. The restoration of rate levels in the Asia-ECSA trade was due to capacity discipline, where carriers outright canceled services in order to bring supply and demand into better balance. The recent sharp rate decline is due to the opposite effect – a lack of capacity discipline, as the extra loaders have injected significant amounts of capacity.

“What will happen going forward depends on whether the carriers will cease their extra loader programs, although, with the lag-time previously seen between capacity action and the SCFI on this trade lane, we might see the spot rates decline for a few more weeks even in the absence of further capacity injection,” CEO of SeaIntel, Alan Murphy says.

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