Q4 Cargo Boost Fuels Rate Surges amid Over-Capacity
Q4 Cargo Boost Fuels Rate Surges amid Over-Capacity

Q4 Cargo Boost Fuels Rate Surges amid Over-Capacity

March 3rd, 2017

A late-year surge of air and sea freight demand sent transporters’ rates higher, but problems that depressed earlier activity have yet to be fully remedied.

The global freight sector experienced a burst of renewed vigor in the fourth quarter of 2016, offering relief from the largely subdued and volatile activity earlier in the year that has continued into 2017. Observers note, however, that it's not clear whether that rebound marks a new era of resumed, steady growth; or whether enduring over-capacity in air and maritime transport will undermine recent rate increases.

For sea freight carriers, that effervescence began in early October and carried through January, driven largely by goods moving from Asia to European companies restoring stocks. That increased business drove volume up by 20% for shippers in Q4, while 40 ft. rates rose from around $1,200 in October to nearly $1,800 by January.

The same freight swell in air cargo started in September and extended through the New Year -- sending transporters scrambling to triple available capacity, and facilitating sizeable rate hikes. But experts say even that late improvement was insufficient to transform 2016 from a lackluster to vibrant year.

"The last three months can't offset the disappointing volumes and the economic results of the first eight months," says Claude Picciotto, air freight procurement director for Bolloré Logistics.

The biggest problem in the air -- and especially sea -- remains rising excess capacity, which coupled with sagging demand has thrown rates into turmoil.

Changes in macroeconomics are exacerbating that. For decades, levels of worldwide economic expansion were invariably outpaced by even higher international trade growth. Over the past year, however, that ratio has reversed, with global exchange no longer acting as the lead driver of wider growth. That inversion occurred, moreover, just as freight transporters were receiving expensive new planes and ships to keep pace with rising capacity demands.

The excess capacity problem is most acute in maritime transport, where shipping lines are responding by reducing available space to prop up prices. That artificial reduction -- and revived Q4 cargo volumes growing even stronger into the new year -- have justified rate increases deep into the first quarter of 2017.

However, experts note the wider financial picture in shipping remains delicate – when not critical -- and sweeping reconsolidation will continue as competitors bind together to survive.

According to cargo consultancy Drewry, demand in sea freight grew just 1.8% in 2016, while capacity increased 4.6%. Anne-Sophie Fribourg, sea freight procurement director for Bolloré Logistics says forecasts for 2017 predict volume growth of.1.5%, while capacity rises another 3.4%. That imbalance is expected to continue through 2019, with 2.6 million TEUs anticipated this year and 27 ships over 18,000 TEUs to be delivered in 2018 and 2019.   

"Shipping companies are doing a lot of scrapping to offset capacity, but that's not resolving the problem of too much space and too many players in the sector," Anne-Sophie Fribourg says.

She adds the mergers, take-overs, buy-outs and partnerships of recent years in the sector should continue into 2017. That consolidation has already left the top six largest carriers holding 50% of the market.

"There are at least three companies whose fates for the next year are anyone's guess, so expect more consolidation," Anne-Sophie Fribourg says. She notes that a reshuffling of existing partnerships set for April will add further volatility and opacity to the market -- and likely lower today's four mega-alliances to just three.

"This consolidation and looming shuffling creates uncertainty and turbulence already affecting east-west routes," she says. "There are other factors – particularly the new American political situation – that raise questions about near- and medium-term activity, particularly if further disruption in global trade arises."

The artificial reduction in maritime capacity was used earlier by air transporters as demand shrunk. But with maritime transporters replicating, the combination of less space and higher demand in sea cargo has sent clients looking to air services for options.

"Reduction of capacity by shipping lines is causing volume to spill from sea to air transport, sending the cost of non-contracted air space up by 20% to 30%," notes Claude. Picciotto. "Tight space availability and higher spot rates will remain the short-term rule, but there's no visibility in the longer-term because capacity reductions are entirely artificial."

Indeed, the underlying capacity and lower trade dilemma remains evident in air cargo despite recent volume and rate increases.

According to the International Air Transport Association, air freight demand increased 2.7% from January through October, 2016 in year-on-year terms, yet capacity rose 5.5%. That imbalance would have been even worse had demand in October not spiked 8.2% compared to the same month in 2015, with capacity rises limited to 3.6%.

Experts say the ways carriers have responded can't last forever. Instead, they say, transporters must permanently resolve their excess capacity problem, or hope for renewed, lasting growth in trade and freight volumes.

"Like shipping lines now, air transporters have parked craft and reduced frequency to lower costs," Claude Picciotto explains. "But that can't lift and support rates the way only real increases in volume can, and the practice winds up dissatisfying clients by distorting visibility in cargo activities."

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