Bad timing

26 Mar 2017

The new alliance set-up coincides with a weak start to the year for headhaul volumes from Asia to West Coast North America – boding ill for BCO contracts.

This year did not get off to a positive start for the headhaul Asia to West Coast North America trade. According to Piers data, covering US port traffic only, the first two months saw volumes from Asia to USWC decline by 9%, comparing badly to USEC (up 4%) and USGC (up 32%).

This follows full-year 2016 growth from Asia to WCNA (including Canada and Mexico) of 4.6%, giving a total of 13.2 million teu - more than sufficient to retain its status as the world’s busiest deep-sea trade. The fourth-quarter 2016 was particularly strong with traffic levels surging by 9.2% year-on-year – the best quarterly rate in at least four years. However, growth was somewhat inflated in that period as there was a sizeable portion of cargo moving in October that should have been carried under a Hanjin Bill of Lading in September, while December’s numbers were also helped by the earlier incidence of Chinese New Year in 2017 than in 2016.

Figure 1: Eastbound Asia to WCNA container traffic ('000 teu)

Figure 1: Eastbound Asia to WCNA container traffic ('000 teu) 

 Source:Drewry Maritime Research

, derived from PIERS and Container Trade Statistics

Notwithstanding the poor start to 2017 Drewry currently sees eastbound Asia-WCNA volumes tracking lower than they did in 2016. This is partly because 2016 was artificially boosted by the fact that 2015 data was skewed by the widespread disruption at the USWC harbours at the start of that year. We also see the rival East and Gulf coast ports taking greater share from the West coast gateways.

Figure 2: 12-month rolling average of eastbound Asia-WCNA container traffic ('000 teu)

Figure 2: 12-month rolling average of eastbound Asia-WCNA container traffic ('000 teu)

Source: Drewry Maritime Research, derived from PIERS and Container Trade Statistics

Our weaker forecast for Asia to WCNA is less a reflection on the strength of the US economy and more to do with shifting coastal trends. Incidentally, we also expect to see competition from the Canadian West coast ports of Vancouver and Prince Rupert continue to entice more US hinterland traffic away from the terminals on American soil, even if those cargoes will still ultimately count in our WCNA pot.

The great unknown is what impact any of President Trump’s more controversial policies will have on this trade, if indeed they do come to pass. If there was to be a showdown between Washington and Beijing it would probably develop over a period of time rather than just happen overnight. Therefore, short-term forecasts of trade growth for this year are unlikely to be affected by events on the world’s political stage.

Figure 3: Eastbound Asia to WCNA capacity ('000 teu)

Figure 3: Eastbound Asia to WCNA capacity ('000 teu)

Source: Drewry Maritime Research

This trade, along with six other routes, is about to undergo some serious surgery as a consequence of the new alliance structure that will come into effect on 1 April. Drewry believes that the monthly slots available on the Asia-WCNA route will likely to increase by about 4% on the headhaul and by 2% on the backhaul when comparing April 2017 versus April 2016.

While the alliance reorganisation will have a sizeable overall impact on capacity, there will still be a number of independent and jointly run services that will work outside of the new three groupings. HMM and Zim remain in the trade, but they are mainly operating on their own. While an agreement has been signed between the 2M lines and HMM, the deal is very much keeping the South Korean company at arms-length.

From April, Zim’s new pendulum (ZMP) will come into play deploying 14 x 4,500 teu ships, while HMM is also set to start three services (PS1, PS2 and PNW) with an average ship size of 6,600 teu. As a result of this, its old standalone loop, HNS, will be suspended. Additionally, the much awaited newcomer, SM Line, born out of the ashes of Hanjin, will launch its CPX with 6,500 teu vessels. The new company will utilise the same pier A as Matson to take advantage of the efficient off-dock transportation facilities there.

Figure 4: Eastbound Asia to WCNA utilisation v rates

Figure 4: Eastbound Asia to WCNA utilisation v rates

Sources: Drewry Maritime Research; Drewry Container Freight Rate Insight

With reasonably buoyant headhaul flows during January, spot market rates duly rose, but worryingly for carriers pinning their hopes on much higher BCO contracts, a similar trend as last year has developed in recent weeks which could signal that fairly turbulent waters lie ahead. Spot rates, represented below by Drewry’s weekly Hong Kong to Los Angeles benchmark, started this year out closing in on $2,500/40ft container and there was plenty of speculation that average BCO rates from 1 May could be brought back up to as high as $1,500 – just short of where they stood in 2015. However, similar to the previous year, by the end of February open market rates had given up large sums and were still falling on a weekly basis. If last year is anything to go by then, by mid-April spot rates of $1,250 could be in the market, and the consequence of that is that BCO prices for the new term would stand little chance of being brought over the $1,000 threshold, at least for the major importers.

Figure 5: Drewry CFRI Hong Kong to Los Angeles ($/40ft container)

Figure 5: Drewry CFRI Hong Kong to Los Angeles ($/40ft container)

Source: Drewry Container Freight Rate Insight

Table 1: Asia-WCNA - estimated monthly supply/demand position

Table 1: Asia-WCNA - estimated monthly supply/demand position

Notes: *Based on effective capacity after deductions are made for deadweight and high-cube limitations and then again for out-of-scope cargoes, ie. those relayed to areas outside the range. Where relevant,operational capacities have also been adjusted for slots allocated to wayport cargoes. Data is subject to change
Source: Drewry Maritime Research

Our view 

It is unfortunate timing for carriers that the alliance re-shuffle coincides with weaker demand. The extra capacity and new entrant will add downwards pressure on spot rates and make obtaining higher BCO contracts in an already over-crowded market that much more difficult.