News / Lines unveil October GRIs as container freight rates drop below break-even level

© Khunaspix Dreamstime.

Container shipping line efforts to increase spot freight rate levels as the negotiating season on annual contracts gets underway appear to already be in tatters, after the main price index covering the route crashed this week.

Today’s Shanghai International Freight Index’s (SCFI) Shanghai-North Europe base port rate came in at $908 per teu, dropping by $147 per teu, and representing a 14% decline from last week’s $1,055 per teu and is the lowest level the index has reached since March.

Industry observers and executives widely agree that $1,000 per teu is the break-even point for carriers on the route – although as larger ships with lower cost-per-teu slot levels are phased into service this may need to be revised in the future.

Nonetheless, as carriers and major shippers prepare to begin negotiating annual contracts for 2015, particularly as forwarders on the trade note that although the SCFI accurately tracks the market, it is by its nature delayed.

“It always lags a little bit – at best it’s either a couple of weeks behind or a couple of hundred dollars under what you are actually being quoted. But it is right insofar as the market is falling quickly,” one forwarder told The Loadstar.

According to quotes sent to forwarders from carriers, seen by The Loadstar, rates in the range of $750-900 per teu are being offered from Hong Kong, Shenzhen, Ningbo and Shanghai to North Europe, and will further cement the trade’s reputation for excessive volatility.

“Ocean freight has become so peculiar,” the forwarder said. “It operates like a commodity market, only with loads of seasonal quirks and other uncontrollable elements – it’s up and down like the proverbial whore’s drawers.”

The following graph produced by one forwarder and passed to The Loadstar illustrates the way the market has swung over the past three years.

Freight Investor Services container derivatives broker Richard Ward said: “The large decline can be attributed to a lack of cargo in the run up to Golden Week, which was contradictory to expectations, as well as aggressive rate cutting in Asia. This has led to a change in sentiment with reports indicating rates as low as $750 are available in the market, suggesting further declines are expected next week.”

Recent attempts by carriers to respond to this before negotiations with beneficial cargo owners (BCOs) get fully underway in October and November have involved the announcement of a series of general rate increases (GRIs) of different implementation dates and amounts.

On Tuesday, Hapag-Lloyd announced a GRI of $550 per teu with effect from 15 October and its G6 Alliance partner OOCL announced a GRI of $650 per teu, while on the same day Maersk announced $450 per teu effective 1 October.

“So how will OOCL’s increase work if Maersk has introduced a different level two weeks before? The longer term relevance is that we are going into the tender season. If the spot market is at $900 per teu then BCOs with an annual volume of 20-40,000teu are going to be looking for $650-700 per teu,” the forwarder continued.

He predicted that post-Golden Week the market would be “so soft”, and lines had already begun to counter the effect of this by cancelling a series of westbound sailings in an effort to curtail capacity.

However, he also predicted that some BCOs may look to delay signing new contracts until January, and then look to lock-in carriers on 15-month contracts that run through to March 2016, whilst others already have similar arrangements in place that could see current contracts last until March 2015.

When, and at what levels, BCOs and carriers sign the new contracts will also depend upon the particular strategy of shipping lines – and how much cargo they carry under fixed contracts – and is a subject of much debate.

For example, the common belief amongst UK-based forwarders is that Maersk carries around 80% of its UK volumes under fixed contracts, leaving just 20% of capacity exposed to the spot FAK [freight all kinds] market; while in recent interviews, Maersk chief executive Soren Skou claimed the line’s volumes were split 50-50.