Drewry: Capacity Cut Leads to Surge in Asia-ECSA Rates

Downsizing of capacity on the Asia-East Coast South America trade has paid dividends to carriers with much improved freight rates, which would tempt container carriers to replicate the plan elsewhere as they will have most success in trades that are most closely coordinated, according to shipping consultancy Drewry.

Most often a sudden rate decrease will take carriers months, or longer, to recover losses, however, the Asia to East Coast South America trade is currently bucking the trend with an unparalleled spike in prices triggered by significant capacity reductions.

Representative spot market rates for the trade from Shanghai to Santos have soared by 420% from January to June despite the decrease of 28% in container volumes on the dominant southbound trade from Asia to ECSA in the first five months of 2016.

“With no push from demand, the only option open to carriers to raise freight rates is to take action on the capacity front,” Drewry said.

Operators on the Asia-ECSA trade have taken drastic surgery in recent months with the effective southbound capacity available to shippers being cut by nearly 30%, in line with the reduction in demand. As of June 2016, there were only three weekly Asia-ECSA services, versus twice that number 12 months prior. The nine different ship operators have settled on units of between 7,500-10,500 TEU (averaging 8,850 TEU).

The reconstructive surgery undertaken in the Asia-ECSA corridor has allowed carriers to significantly improve their ship utilisation, giving them the traction needed to raise freight rates in a depressed market.

However, Drewry said that the same strategy could not be used in other trades as each trade has its own special dynamics that make it easier or harder for lines to react in ways that can positively influence pricing.

For example, the Asia-Middle East trade is far more uncoordinated than Asia-ECSA as it has many more competing lines and its dual structure of dedicated services alongside wayport loops make it “virtually impossible to set the specific capacity needs of the trade as it is always subject to the developments happening in the bigger Asia-Europe market,” Drewry added.

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