Capacity, Rate Tension Affect European Exporters in 2017

July 7th, 2017

Return of strong economic and export activity in Q1 provoked capacity strains and rate hikes that have abated since -- but may resume in the second half of 2017.

Improved global economic and export activity fueled increases in freight volumes in the first five months of 2017, pinching available capacity and lifting rates in both air and maritime sectors. But in addition to those developments making cargo delivery more expensive and complicated for exporting companies, observers say accessory factors risk making the rest of 2017 equally tricky.

"The considerable tension created by increased demand, tight capacity, equipment shortages and East-West alliance reshuffling in the first quarter has lessened only somewhat in the last month of Q2. But it is likely Q3 and Q4 will be tighter on the main trades, too," explains Ms. Anne-Sophie Fribourg, Sea Freight Procurement Director for Bolloré Logistics in Paris. "It's a seller's market, and transporters are making the most of that."

As in the past, maritime experienced much of that Q1 tension.

In recent years, enormous and expensive capacity expansion sector-wide coincided with stalling economic and export growth. As a result, carriers have tried to offset the supply/demand imbalance by scrapping or parking ships -- artificially reducing capacity to prop up rate levels.

The last quarter of 2016 and start of this year, however, featured a return of economic expansion – led by Asian and US growth – and export strength, particularly on West-East routes. Maritime freight consultants Drewry says global Q1 volumes rose 17% -- up from 7% in the same period 2016, and far outpacing the quarterly growth average of 2.3 since 2010.

Yet despite that rebound, maritime transporters have not responded with significant reintroduction of idle capacity. Instead, it appears most now plan to continue limiting freight capacity to further increase rate-based margins. According to Drewry, benchmark rates on some trades soared by 48% amid generally rising prices.

"Rates for Asia/Europe in June last year were around $700, and are now about $1,200 as transporters target $1,800 for the peak period," says Ms. Fribourg, who notes only five maritime carriers posted Q1 operating profits in a sector that collectively lost $3.5 billion in 2016.

But the effort of carriers to maximize income while they have the advantage has created higher costs, penury of container space and often renegotiation of contracts for export-disrupted clients.

"The shortage of space and extent of rate increases has resulted in less visibility and more volatility on all trades," Ms. Fribourg says. "With transporters offering few if any commitments -- and equipment often in as short supply as capacity -- exporting clients face real instability."

Influencing the maritime equation further is the continuing wave of merger and alliances provoked by the sector's financial crisis. That consolidation has left fewer players exporters can turn to for competitive pricing – a winnowing of the field likely to continue until the fundamental over-capacity problem has been fully resolved through long-term growth in demand.

"Despite the current rise in volume, the sector's financial worries will drive additional consolidation -- especially with new capacity increases expected exceed demand again in 2018," Ms. Fribourg says.

Similar, albeit less severe developments affected the air sector, which handled spilled-over maritime demand amid a general rise in its freight activity.

According to the International Air Transport Association, Q1 cargo volumes increased 8.5% versus the same period in 2016. Freight activity then plummeted in March before rebounding in April to resume moderate growth. In its analysis of Q1 airfreight, Drewry reported sector rate increases of 8%.

"Greater volumes and displaced maritime freight pushed Q1 rates up, but activity and prices have stabilized since," says Mr. Claude Picciotto, Air Freight Procurement Director for Bolloré Logistics. "We're bound to see both increase again with peak period activity and strong Q3 and Q4 volumes."

Mr. Picciotto mentions observers are also watching the isolation of Qatar by its neighbors, which is forcing flights in and out of the emirate to take wide air space detours. "There's been no general impact thus far, but along with the fluctuation of volumes, capacity and rates, we'll keep a close eye on Qatar, since it's a major cargo player," he adds.

Mr. Picciotto says Q1 surges that lengthened wait periods for capacity from one to two weeks have since dropped to 48-72 hours. That has created greater stability and visibility in air cargo, though a robust second half of 2017 could well change that again.

"As always, exporters trying to react to developments can expect less space and higher rates, while those with longer term strategies and investments, and logistics and transport partners will be fine" he declares, noting the role those specialists play in efficiently navigating instability in the sector. "When things get complicated, it's added value and solutions provided that stand apart and make the difference." 

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