By Jite Eriabie
Carriers’ lack of success implementing spot market freight rate increases in September is less worrying than it appears, according to shipping consultancy Drewry.
As lines managed to tame some of the volatility, Drewry’s World Container Index has shed around USD 190 over the past six weeks, just over the sum it had previously added in a single week at the start of August.
On the surface the characteristics of this year’s spot market are no different to previous years. Weekly price cuts are common and, just as in the past, the tendency has been that the weekly erosion is punctuated by the life-giving properties of a general rate increase (GRI) at the start of a given month.
The difference this year is that the GRI inflation has been lower – averaging USD 120/40ft versus USD 160/40ft in 2016 – but the weekly decreases have been much shallower.
Carriers have experienced fewer highs but less alarming lows this year. The end result of this greater calm is that freight rates along some of the main East-West headhaul trades are up by as much as 50% year-to-date.
While carriers have become accustomed to weekly decreases they have always needed the monthly GRIs to give life to sagging rates and prevent a prolonged tailspin.
“Missing out in September is obviously not what they wanted, especially after having also failed to get any traction in June, but it is important to add some context before we rush to pronounce the market’s collapse,” Drewry said, adding that it is not uncommon for GRIs to come and go without success, only for the pattern to re-establish itself very quickly.
In any case, the importance of GRIs and their successful adoption is over-stated. In reality GRIs have always been a rather crude device to raise rates (usually only temporarily) without much basis in real supply-demand economics. Their size and success rate has in the past more often depended on how well carriers pleaded poverty when rates sunk to non-compensatory levels.
With freight rates expected to remain profitable, GRIs will become less important and more modest in size, more proportionate to the prevailing supply-demand dynamics.
“Using this criteria a measure of industry health, carriers are undeniably winning right now. Freight rates have been profitable for most of the year and are significantly higher on average than last year, supported by solid supply and demand dynamics,” Drewry said.
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