Market Rates and Trend Forecast - Europe

July 2nd, 2019

Ocean Freight

Ocean freight rates for the first half of July remains largely unchanged to the United Kingdom as compared to the latter half of June with narrow fluctuations within a band of US$50/FEU . The mostly unchanged rates are a strong sign of slowing demand, weakening economic growth and excess capacity. The number of mega vessels on the Asia-Europe trade also contributes to an oversupply in the market as supply outweighs demand.

Blank Sailings

THE Alliance consisting of Hapag-Lloyd, Ocean Network Express and Yang Ming has announced 4 blank sailings in July just ahead of the peak season. The void sailings will reduce capacity by 67,700 TEUs and is an indication of weakening demand. One of the services that will be affected is the largest Asia-Europe loop serviced by THE Alliance with vessels averaging 19,000 to 20,000 TEU in capacity. There is also speculation that there will be additional blank sailing announcements by members of other carrier alliances.

In contrast to the Trans-Pacific trade, carrier’s capacity management through void sailings in the Asia-Europe trade has failed to lift ocean freight rates and exposes excess capacity.

Weakening Economic Growth

Although the Asia-Europe trade has shown a 7% year over year growth in the first quarter, the rest of the year remains uncertain. The Purchasing Managers’ Index (PMI) is an indicator of economic health in the manufacturing sector and has been contracting since February while reaching a 6-year low in April. This reflects decelerating export momentum and the effects that it may have on Europe’s economy.

Analysts are currently forecasting a weakening in demand growth over the next few quarters while the International Monetary Fund (IMF) has revised its growth forecast for Germany, Europe’s largest economy, to 0.8% from 1.5%. Given the anticipation of rising fuel costs related to the 2020 Low Sulfur Mandate, it seems that freight rates are likely to increase in the second half of the year in order for ocean carriers to recuperate rising expenses.

Mega Vessels

Besides the immediate benefits of boosting capacity, mega vessels can also prove to be a logistical nightmare. A vessel with a call size of 8,000 TEUs requires approximately 14 trains, 1,100 trucks and 12 barges for transshipment and inland deliveries. With multiple mega vessels calling at a port at the same time, rail, truck and barge operators can be easily overwhelmed. It is important for importers to consider possible delays when planning shipments ahead of time.

Despite this, MSC is on track to take delivery of 11 ships with 22,000-23,000 TEUs, CMA CGM with 9 vessels of 22,500 TEUs and HMM with 12 ships of 23,000 TEUs between August and 2020. On a positive note, over capacity and a lack of carrier capacity management can lead to lower ocean freight rates as supply outstrips demand.