Market Rates and Trend Forecast

March 4th, 2019

Ocean Freight

Even with the 35 blank sailings between week 6 and week 8, ocean freight rates continued its post Lunar New Year decline by approximately another US$100/FEU to the USWC and USEC compared to the second half of February. Although we feel more optimistic from the previous month, we are inclined to believe that the continuous decline in freight rates may be short lived.

U.S./China Trade Dispute – Update

Although the potential for an escalation in the trade dispute still exists, developments in the past few weeks is something to be optimistic about. President Trump’s decision to postpone the initial March 1st deadline for additional tariffs provides both governments with more time to negotiate and businesses with room to breathe. Further to the temporary truce, people familiar with the trade discussions have said that U.S. officials are preparing a final trade deal that both presidents could sign as soon as mid-March.

This is not to say that a trade deal is for certain since much work still remains but as Larry Kudlow, director of the White House’s National Economic Council, says, “The progress has been terrific. We have to hear from President Xi, but I think we’re headed toward a remarkable historic deal.” The U.S. Trade Representative’s office also said on Thursday that it will publish a notice delaying the increase of tariffs on Chinese imports until further notice (compared to a previously reported 60 days delay).

Owing to these positive developments, we believe at the moment that the risk of ocean freight rates increasing due to the trade dispute is reduced since there is less need to continue front loading cargoes as was done in previous months when tensions were escalating.

A Worry for the Container Shipping Industry

One of the larger worries currently surrounding the container shipping industry is the International Maritime Organization’s low-sulfur rule that is looming ahead. Carriers are attempting to pass on the additional costs related to low-sulfur fuel to shippers and beneficial cargo owners but failure to pass through sufficient costs can lead to a potential withdrawal of capacity.

In the event where capacity is withdrawn due to a carrier loss-making situation, any space beyond the weekly minimum quantity commitments are charged a very steep premium and this makes for a difficult situation given demand for spacing and the number of available carriers that remain in the market.

Although there is still time for the industry to come to a compromise on the additional costs, it is almost inevitable to see a rise in costs later this year as ocean carriers have already begun announcing fuel/bunker recovery charges. OOCL estimates the total cost of the new regulation will cost the industry US$60 billion per year.

World Bunker Prices

Although oil prices fell by 2% on Friday due to bearish U.S. manufacturing data, data shows that Asia’s developing economies are the key drivers to global oil demand that continues to prop up prices. Even if demand for oil peaks/declines, many assume that OPEC will simply reduce their output. OPEC reduced their output by roughly 300,000 barrels per day from January levels (lowest level since 2015). Oil exports from Venezuela has also plunged by roughly 40% since the U.S. government imposed sanctions in late January.

Air Freight

Air freight rates have all declined from February levels and will remain so until mid-March. The lower freight rates for the first half of the month can be attributed to the post Lunar New Year period where factories have just begun to resume operations. By mid-month, we are anticipating an increase in air freight rates when orders are ready to be shipped out.

Hong Kong

Rates declined approximately 15% at the beginning of the month as compared to February. We are anticipating a mid-month increase in freight rates as demand for air cargo space increases.

Shanghai, Shenzhen, Guangzhou

Rates have declined by 5% at the beginning of the month and will remain in place until mid-month when airlines will review