Pressure on Container Rates in Freight Rate Roller Coaster

2011 has brought some relieving news for businesses that import and export goods. Perhaps you have noticed it in your books. Container rates are on a downward trend as increase in container carriers and capacity has been surpassing demand. Carriers have been increasing container capacity, as many of their ship orders placed from years ago are now being placed into service, while container transportation has not reached its expected growth. For the moment, this means potential for competitive prices for shippers and continued supply/demand pressure which will dampen the hopes for significant pricing hikes by carriers.

Before you get too excited that shipping freight rates will finally settle and be steady, consider the following lingering issues. There are many factors that contribute to the volatile freight rates of the sea shipping industry; however, none more so than the basics of supply and demand.  Demand on U.S.imports is expected to pick up during the traditional peak season of June to November; however, this year things have gotten to a slower start. Most carriers postponed their peak season to the end of July or early August, 2011. This is no doubt partly because of less than expected volume during this season and the carrier overcapacity caused by increased vessel space. Ocean capacity is increasing by 8.8% in 2011 while there is only about 4.4% trade growth.

Massive ships, with significantly greater capacity have already hit and are hitting the seas during the next several years. Routes between Asia and Europe have increased capacity by 15% while demand is only predicted to grow by 7.5% there. Despite all this, the carriers can still manipulate their capacity by sidelining ships to control supply and drive prices up.  This they haven’t done so far in 2011 as they did in 2010.  But if they get together to pull this off again it could wreack havoc on freight rates once again.  Will the carrier losses prompt them to tighten capacity once more later during the year?  That is what will remain to be seen.

Air carriers have already begun removing capacity to boost rates and maintain their freight profit. Sea carriers have been known to do the same. In 2009, when the supply of carrier ships far outweighed the demand of shipped goods, hundreds of sea carriers were docked. This strategy of removing capacity reduced costs and pushed ocean rates back up, turning things back in the favor of the ocean carriers very quickly.  This is a strategy they used last year which helped the ocean carriers have one of their most profitable years. Although this is less likely in 2011 due to the significant increase in capacity, its potential is there and could cause significant price hikes if implemented. Of course, any industry’s market is more complicated than supply and demand. Fuel prices have also increased this year and the fuel bunker’s continued uncertainty and volatility will keep the freight rate roller coaster an unpredictable and nauseating ride for shippers.

So before getting too excited about the unusual calm in freight rates, be ready for more swings up and down. At least 2011 is more likely to give a less volatile ride than 2010.

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For more on capacity overtaking demand, click here.