Nearly 150 sailings were cancelled on the transpacific and Asia-Europe routes between October and February, according to Drewry’s research. These have had demonstrable effects on freight rates and on the regularity of service provided to shippers, as shown below. But will this carrier practice of cancelling sailings continue beyond the winter months?
Ocean carriers’ individual strategies of cancelling sailings instead of withdrawing services during the northern hemisphere’s winter season has not been without controversy.
Although both operations aim to achieve the same objective of stopping average vessel utilisation falling to keep freight rates up, the impact on shippers is very different. Shippers know where they stand with service withdrawals, whereas the blanking of sailings sometimes leaves them confronted with unexpected space shortages and roll-overs, as surrounding vessels quickly fill up. In this sense, the average capacity reduction of between 2% and 7% achieved so far by sailing cancellations is deceptively small.
The tables below demonstrate the number of cancelled sailings in the Asia-North Europe and two transpacific trades between October and November, along with the estimated impact on average ship utilisation.
Eastbound Asia-WCNA – estimated monthly supply/demand position
Eastbound Asia-ECNA – estimated monthly supply/demand position
Westbound Asia-North Europe – estimated monthly supply/demand positionThe impact on headhaul freight rate levels has been correspondingly dramatic. For the most part, spot freight rates continued to fall between September and November, but then shot up in December as ship utilisation tightened, only to start falling again by the middle/end of January when cargo declined because of the Chinese New Year.
Eastbound Asia-WCNA – impact of cancelled voyages on average ship utilisation and spot rates
In more detail, all-in freight rate quoted to forwarders for spot cargo from Shanghai to Los Angeles fell by 19% between October and December, down to $2,057/40ft, according to the World Container Index, but then shot up by 16% in February, to $2,376/40ft. Rates from Shanghai to New York fell by 9%, down to $3,157/40ft, but then increased 12%, to $3,526/40ft. The average from Shanghai to Rotterdam fluctuated more violently, rising 20% between October and November, up to $2,578/40ft, then fell 11% in December, rose 14% in January, and fell 10% in February, down to $2,363/40ft.
Eastbound Asia-ECNA – impact of cancelled voyages on average ship utilisation and spot rates
Westbound Asia-North Europe – impact of cancelled voyages on average ship utilisation and spot rates
In other words, rate improvements gained through vessel cancellations have been short lived due to the very temporary nature of the operational measure. Given the time lag of about a month between cause and effect, it seems logical to suppose that headhaul freight rates will continue falling in March, therefore.
The strategy of withdrawing individual sailings is not new, particularly around the Chinese New Year holiday, which this year fell between 10-17 February. What is new is the extended period of the practice, which suggests that it could in future become the norm, although nothing has yet been announced for March and April.
These are usually peak months for cargo growth, however, so ocean carriers may just be in ‘watch and wait’ mode. Asked to comment on this, a major ocean carrier executive simply replied: ‘We are now in the traditional slack season period after CNY, so [the recent fall in freight rates] is not surprising in terms of “spot market” activity. Key is what the market looks like in “steady state” post April.’
The indecision is partly understandable, as cargo growth to Europe and the US has seldom looked more fragile. Large parts of Europe are still hovering on the edge of recession, and the US Government has only just been obliged to start implementing ‘the sequester’, a remedial measure aimed at reducing its national deficit from almost $40 out of every $100 that it spends.
Shippers contacted by Drewry are not happy with sailing cancellations for obvious reasons. They want stability, and have been saddled with volatility. The damage caused has been less for big customers, as they have only been confronted with schedule gaps, not rate volatility.
According to one, although the gaps have been well advertised in advance, they have often been slipped through as simple schedule adjustments, rather than exceptional service failures, so have not always been detected in time. Like container tracking and tracing, ‘exception reporting’ would be better in this respect.
The executive lamented: ‘Our ability to get through the winter unscathed has depended on our skill in managing the change, rather than on advice from carriers.’
The shipper is so worried that the trend of ad hoc vessel cancellations will be continued that, at its next contract renewal, carriers will be asked about the number of sailings blanked in each key service, not just about its schedule reliability monitored by Drewry’s Carrier Performance Insight.
He is right to do so. In Maersk Line’s presentation at last week’s TPM conference in Long Beach, chief executive Soren Skou suggested that the way sailings between Asia and North America have recently been cancelled demonstrates that ocean carriers are becoming increasingly adept at managing vessel capacity short-term.
He pointed out that the 31 sailings withdrawn between Asia and the US immediately after the Chinese New Year not only enabled carriers to save the cost of running half empty vessels; it also permitted them to manage freight rate levels more effectively – the implication being that the industry is likely to see more of the practice in future.
Another big shipper complained about cargo from Shanghai to Canada recently being rolled ‘out of the blue’, much to the distress of its consignee. It is a common complaint, according to Drewry’s shipper feedback.
Eastbound Asia-WCNA – capacity reductions from cancelled voyages
Eastbound Asia-ECNA – capacity reductions from cancelled voyages
Westbound Asia-North Europe – capacity reductions from cancelled voyages
Uncertain cargo growth to Europe and the US will encourage ocean carriers to continue with short-term vessel capacity planning, which means more sailing cancellations to come. The problem will be exacerbated as service upgrades enforced by newbuild deliveries and cascading gains momentum.