Market Rates and Trend Forecast

June 3rd, 2019 In addition to ocean freight and air freight rates, we have also included a brief section mentioning U.S. rail demurrage and the effects of tariffs on chassis rentals.

Ocean Freight

Ocean freight rates for the first half of June increased by approximately US$300/FEU to the USWC and US$100/FEU to the USEC compared to the final week of May. We speculate that this rate increase is related to the start of the back-to-school shipping season along with additional blank sailings in June to prevent a decline in spot rates.

June Blank Sailings

The Ocean Alliance has decided that they will blank a sailing on June 2nd from China to Los Angeles, a June 4th sailing to Seattle and a June 18th sailing to the USEC. The June 2nd blank sailing to Los Angeles represents a 15% reduction in capacity from The Ocean Alliance. The blank sailings ahead of traditional seasonal patterns fuels suspicions that there is a weakening in U.S. import volumes and an attempt by The Ocean Alliance to prevent deterioration in spot rates after 3 continuous weeks of declining rates.

Possible Frontloading

At the moment, demand for capacity in June appears to be relatively strong due to the start of back-to-school shipping that will eventually reach into the traditional peak season starting in August. However, U.S. President Donald Trump’s threat of possibly levying tariffs on an additional US$300 billion worth of imports from China creates much uncertainty and may create a scenario similar to 2018 when U.S. importers rushed to frontload cargo ahead of tariff deadlines. Such uncertainties may lead to deviations in traditional shipping patterns.

China Q1 Exports

China’s exports to the U.S. dropped 13.9% in the first quarter of the year compared to the same period in 2018 and a 2.7% decline in the month of April versus a forecasted 3% increase. We suspect that the global economy hasn’t bottomed out and that trade tensions along with uncertainties are weighing on China’s trade figures. Continuous weak figures in exports could potentially lead to a decline in ocean freight spot rates and an increase in blank sailings as President Trump and President Xi appears to be digging in for a protracted dispute.

U.S./China Trade Dispute – Continuous Escalations

The Trump administration’s decision to place Huawei Technologies Co. on a U.S. blacklist, the ramping up of tariffs on US$200 billion of Chinese products and the possibility of additional tariffs on US$300 billion of goods has largely been viewed as a sharp escalation in tensions in May. This has led China to ramp up tariffs of its own on US$60 billion of U.S. goods, a halt on U.S. soy purchases and the threat of restricting the export of rare earths to the U.S.. The impacts of the trade war are roiling global markets, weakening global growth, denting consumer sentiments and creating uncertainties.

Tariffs and Chassis Rental

The recent increase of tariffs from 10% to 25% by the U.S. administration includes cargo equipment such as chassis. Many chassis providers in the U.S. manufactures their chassis in China which are now subject to U.S. import tariffs. Chassis and equipment shortages have been issues in certain parts of the U.S. and import tariffs creates reluctancy amongst domestic chassis providers to purchase as many as they need due to the worries stemming from the trade war. The result is that beneficial cargo owners are likely to see a shortage in equipment, a rise in daily rental rates and additional demurrage charges.

Rail Demurrage

In recent months, rail demurrage charges have been a heated topic amongst shippers believing that the fees are used as a revenue generator for rail operators. On the contrary, the operators argue that they are crucial in order to maintain network fluidity. According to statistics provided by the U.S. Surface Transportation Bureau, demurrage and accessorial revenue rose by nearly 29% for the seven North American Class I railroads in 2018 (over 2017). Within that same time frame, 5 out of 7 railroads increased their revenue by double digits.

Although ocean freight has been experiencing a downward trend lately, it appears that costs associated with inland destinations have been surging in the past year. Despite the concerns, the U.S. Surface Transportation Bureau and Federal Maritime Commission does not have authority to regulate intermodal rail operations.

Air Freight

Air freight rates from Hong Kong and Taiwan remains largely unchanged from May levels whereas rates in China’s Guangzhou, Shanghai and Shenzhen are set to gradually increase throughout the month.

Hong Kong

Air freight rates from Hong Kong and Taiwan remains constant from late May levels and is expected to remain until mid-June as demand remains relatively constant. However, there has been a minor increase in cargo fuel surcharges with effect on June 1st.

Shanghai, Shenzhen and Guangzhou

Rates from Shanghai, Shenzhen and Guangzhou are being revised by airlines on a weekly basis and is expected to gradually increase as demand for capacity is showing signs of growth.