Transportation & Logistics Analysis

Shanghai - Los Angeles: sharp rate increase recorded this week

July 03 2019

Let’s move on this week to the Transpacific Eastbound liner trade. The SCFI index published June 28th shows a surprising increase (+24,5% week to week). And, with the 4th of July this week, meaning vacation time and activity slowdown in the US, the week will most likely be blank.

1- The facts:

  • Summer capacity restriction announcements (29,000 TEUs for Ocean Alliance in July).
  • Announcement and implementation of General Rate increases across the board.
  • We are now getting closer to the unavoidable low sulfur discussions planned with the shippers for September, at the carrier’s initiative.
  • The transpacific service offering is more concentrated than the big Asia-Europe market.

2- The context:

  • Both sides of the industry, shippers and carriers, still have the historically high rates of 2018’s second semester in mind.
  • The Trump / Xi battle is now becoming a never-ending discussion, which creates volatility, and is starting to be seen as a serious threat to financial results for the year.
  • Some US retail players are stockpiling inventory in anticipation of market volatility, to secure full warehouses at "acceptable" freight rates for the second half of 2019.

The combination of these factors is clearly "over-heating" the transpacific market.

Capture d’écran 2019-07-03 à 14.39.37Historical view on average rates in Port to Port (with THC) estimated by Upply over the past 24 months – July 3rd, 2019

A difficult situation for carriers...

On the one hand, active transpacific carriers would definitely dream of a scenario where the 2019 S2 is a cut and paste of 2018, to try to salvage what they can in terms of consolidated P&L for the fiscal year.

After a disappointing first half of the year in terms of P&L for the top 10 carrier, a second half bearing higher profit margins could really turn things around.

But no one knows where the low sulfur discussions of September will lead, and this may be the "last blow" for the carriers who may have to suffer cost repercussions.

... and for US retailers

On the other hand, there is a lot of pressure in the US retail industry, where players are looking to secure most of their cargo for the second half of the year at rates as close as possible to the ones from May 2019, and who are ready to pay extra related warehousing fees.

From our perspective, as a supply chain manager, adopting a “wait and see” attitude is a risky thing to do, particularly as some finance managers started to realize, just a couple of months ago, the real impact of the extra costs from 2018 Q2 on operational margins.

Photo : Port of Los Angelas


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Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).
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