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Lack of capacity withdrawal on Asia-Europe trades risks weak contract rates



ASIA-EUROPE freight rates increased slightly at the end of October, however, they are now 30 per cent below the level recorded at the end of June since decreasing during the peak season.

Drewry is now warning that shipping lines are putting their contract prospects on the trade lane at risk if they don't move soon to withdraw capacity to halt the decline in spot rates.

The weekly rate movements of the Shanghai Shipping Exchange's SCFI - tracked by JOC.com's Market Data Hub - shows that after reaching US$951 per TEU on June 30, the rate declined steadily before rising slightly in the week of October 23 to $744 per TEU. Spot rates on Asia-Europe remain below the level seen during the same week in 2016, reported IHS Media.

Yet despite the steadily falling rates and contract negotiations that are already underway with some Asia-Europe shippers, carriers have yet to announce any service suspensions for the slack season.

"One of the cornerstones of our assessment that carriers will improve profitability next year in spite of a heavy burden of new ships is that we expected them to demonstrate the same level of capacity management skills as they have in the recent past," Drewry noted in its Container Insight Weekly.

However, the analyst said there has been a complete lack of service suspension announcements for the traditional shipping slack season in the fourth and first quarters.

"That would be understandable if demand and freight rates were strong, but that isn't the case now as spot prices on the east-west trading routes have been on a downwards spiral for a number of months. This situation is most significant in the Asia-Europe corridor where annual contract negotiations are already underway. Every weekly deflation to spot rates further weakens carriers' negotiating position."

There are strange forces at work on Asia-Europe this year, however. Not even double-digit export volume increases at China ports could support a steady round of rate hike attempts that carriers made through the peak season.

Alphaliner has reported that despite the strong peak season, there were no reports of space shortages, with carriers instead adding multiple extra loaders to meet additional demand. That appears to have effectively undermined efforts by the shipping lines to boost rates and suggests a tough fourth quarter lies ahead.

Drewry said on the key westbound Asia to North Europe route, ship utilisation has trended upwards since October 2016, while spot rates have headed in the opposite direction. This, the analyst said, heavily implies that there is some element of undercutting occurring in the market.

"It could be that the strong fundamentals are what have made carriers more resistant to withdrawing services," Drewry noted. "They might be thinking: with ships close to full, where's the need to stop services now?

"If that is the thought process, that would miss the point: They have increased their exposure to the risk of locking into much lower prices for next year than they might have got had they temporarily removed some capacity."

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