Freight rates are on the up as westbound shipments improve from Asia to the Middle East and in to particular to South Asia.
Container shipments from Asia to the Middle East improved by 1.6% year-on-year in May, according to the latest release by Container Trades Statistics (CTS). That wasn't enough, however, to register year-to-date growth; five-months 2017 volumes were down by 2.6% at 1.3 million teu.
Despite the lacklustre start to the year, Drewry believes annual trade growth could rebound back in 2017, by potentially as much as 3%. With the firming of oil prices, sentiment at both a consumer and business level has improved this year in the region. The UAE, one of the two largest markets in the trade along with Saudi Arabia, has proved itself to be more resilient to the impact of the slump in oil prices than most other countries in the region as it continues to benefit from a relatively diversified economy, political stability and ample foreign assets.
Admittedly, the IMF has lowered its 2017 GDP forecast for the UAE by one percentage point to 1.5%, but, looking further out into 2018, economic growth is expected to accelerate to 4.4% with project activity in the country likely to recover next year as preparations for Dubai Expo 2020 get underway.
The Asia to South Asia market continues to expand. The latest CTS data puts westbound volumes up by 6.4% after five months, following a massive 16% jump in May. It is very possible that demand could rise by as much as 7% this year to surpass the 2016 growth rate of 4.9%.
Last year, the growth was to East India; in 2017, it has been the West Coast market that has thrived. Consumer goods have been in strong demand, as have automobile components and tyres bound for India's expanding car production plants. Unit sales of passenger vehicles in India during the last fiscal year (which ended 31 March) crossed the three million mark for the first time ever, growing at their fastest rate in six years. In addition, large volumes of solar panels continue to arrive from China.
From 1 July, the Indian government is introducing a major revamp of its VAT (or Goods and Services Tax) system and it remains to be seen just how this affects the inflow of imports. Some companies, particularly in the consumer goods sector, have been selling off their inventories to avoid having to deal with two different prices for the same product and there could then be a rush to restock.
In Pakistan, more large shopping malls are under construction or have become operational across several major urban centres. Superstore chains are opening new outlets in unprecedented three-digit numbers and this is bound to drive up demand for imported consumer goods.
There will inevitably be some seasonal drop-off in cargoes in the third quarter in comparison to the second quarter but, with both Ocean and THE now including Asia to Middle East in their vessel-sharing agreements, an opportunity exists for a more co-ordinated approach to balance trade-level supply with demand.
The Asia-Mid-East trade has always been the most fragmented of the major routes, with a large number of players and vessel providers operating outside any alliance, and with different sizes of ships and commercial strategies. The formation of the new alliances in April has given a little more structure to the trade with Ocean Alliance members having an obvious dominance. The members of this grouping control nearly half the capacity of direct services. The other alliances come in at around 10% and, from a 2M perspective, MSC and Maersk are not big players in this market and in any case operate purely independent loops.
Of the 18 carriers deploying ships on dedicated Asia to Middle East services, seven are using ships of at least 8,000 teu across their system. However, many other lines are still deploying ships of 4,000 teu-5,000 teu, which means there is plenty of scope for upgrading and service rationalisation in the future.
Space is reportedly tight in the Asia to South Asia market, prompting HMM, CMA CGM and three other lines to launch the China West India Express (CWI) service at the end of June, using six 4,600-teu vessels. While five new dedicated Asia to South Asia services have started in the past 12 months or so, the average ship size has decreased as most of the new launches involved sub-4,000 teu tonnage.
Even with the new CWI loop the total effective capacity (including estimated shares from wayport calls on Asia-Europe services) on the trade is being kept in check with August's slots expected to be no more than 5% higher than the same month last year. It should be remembered, however, that the trade experienced a significant capacity injection from April 2016, hence why the annual comparisons are tapering off.
Spot rates on the Asia to Middle East trade have been somewhat erratic with large monthly gains quickly snuffed out. That was the case in May when Drewry's Container Freight Rate Insight reported that Shanghai to Jebel Ali 40ft spot rates shed $600 to wipe out most of April's hike. Spot rates on the same corridor then spiked again in June to reach $1,920/40ft. Ignoring the volatility, rates have trended upwards for a year and June's benchmark was double that of the same month last year.
Freight rates on the Asia to South Asia tradelane are also trending upwards, although they lack the wild swings of the Middle East. The benchmark rate for Shanghai to Nhava Sheva hit a 30-month high in June, gaining over $200 in a month to $1,290/40ft. Again, this is more than double the price of the same one year ago.
Against expectation it is in the slower Asia to Middle East market where spot rates are seeing the most traction. Prices in both lanes should at the very least hold firm over the coming months.