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05/07/2017
Half-time lead.

Global spot market freight rates were more than one-third higher in the first-half 2017.


Global spot market freight rates were more than one-third higher in the first-half 2017 with big increases across most trade lanes. What direction will they take in the second half of the year?

Having hit the halfway stage of the year, we thought it would be interesting to review a range of spot market rates across a wide spectrum of trades, to see just how big the correction over last year has been and how broad the recovery is.
 
Data from our Container Freight Rate Insight database shows that Drewry’s Global Freight Rate Index was some 36% higher after six months of 2017 versus the same period in 2016. But before we get carried away with that stellar growth, it is important to put it into context as last year was an exceptionally poor one for carriers when it came to securing compensatory rates. When compared to the first half of 2015, spot rates for 1H17 were still 4% lower.
 
The contrasting paths spot rates took in 2015 and 2016; the former starting high and ending low while the latter did almost the exact opposite. Up until March 2017 spot rates landed somewhere in the middle of the two. Despite some seasonal erosion, rates this year overtook monthly averages for both 2015 and 2016 from April onwards. The big question is: which of the second-half trends will rates for this year follow - the declining path of 2015, the resurgent 2016 direction, or something in between?

Before we answer that question, let us look more closely at representative spot rates within specific trades to gauge where the recovery has been the strongest.
 
Starting with the East-West headhaul markets we can see from Figure 2 that the rate recovery has been most prolific in the westbound Asia to Europe corridor. Drewry’s Asia-Europe WB Index was up by 61% year-on-year after six months of 2017 and even performed better against the same months in 2015, being higher by around 12%. Eastbound Transpacific rates saw slightly more muted growth this year at 33%, which was insufficient to better the 1H15 average. Spot rates in the Transatlantic westbound market, which admittedly is more contract-oriented, were lower in 1H17 than in either 1H16 or 1H15.

It was a similar story in the backhaul direction with rates from Europe to Asia significantly outperforming the other trades. Eastbound Europe to Asia rates were given a boost earlier this year during a temporary space shortage caused by stronger demand and alliance reorganisation, as outlined in the April trade route analysis ‘Maxed out’. As predicted, backhaul rates are gradually softening on this trade and we expect a further weakening in July.

There are some very high columns in our sample of seven North-South headhaul trades, the tallest being an 83% year-on-year hike to 1H17 India to Europe (Nhava Sheva to Rotterdam) rates. The weakest so far this year has been in the Asia to Australasia (Shanghai to Melbourne) and East Coast South America to Europe (Santos to Rotterdam) trades. Only three of the seven selected lanes (Santos to Rotterdam; Shanghai to Melbourne; and Shanghai to Nhava Sheva) failed to top their 1H15 averages.

Backhaul North-South trades have generally failed to generate much additional revenue to carriers in 2017 with the most notable exception being Europe to India (Rotterdam to Nhava Sheva) that was up by 39% against 1H16 and 12% versus 1H15. There was also some uptick in rates from ECSA to Asia (Santos to Shanghai).

The charts above point to a fairly broad recovery back to 2015 levels, especially across the headhaul trades that are most important to carrier revenues. Notwithstanding any seasonal fall-off we also know that the recovery held up well in the second quarter and should continue throughout the remainder of the year.
 
With carriers on the verge of returning to profitability thanks to these higher spot rates and improved contracts, combined with the extra pricing power gained from M&A and stronger fundamentals, we think it highly unlikely that there will be a return to the pricing wars of early 2016. Due to the higher 2H16 rates the comparisons will get tougher as the year goes on, which will put an end to the very high year-on-year increases, but even if they plateau or start decreasing in 4Q17 they will still be higher than in 2H16 as a whole.

 

 

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