How China’s Intervention May Affect Capacity and Rates for Ocean Freight Long-Term
As ocean cargo rates continue to surge, China’s Ministry of Transport is taking steps to prevent any further increases. Last week, Chinese authorities discussed a possible ban on rate increases, which would apply to the GRI planned for mid-September. To boost capacity, they also suggested prohibiting the blanking of any sailings on the transpacific route, significantly impacting the ability of carriers to manage capacity and maintain a profit. Although nothing has been established as of yet, carriers and shippers alike should consider how this could impact their shipments.
Increasing Rates Through Q2
In spite of COVID-19, ocean freight carriers around the world are seeing a year-over-year increase in profit. In fact, demand has made Q2 2020 the most profitable second quarter for carriers since 2010, with a total earned profit of $2.7 billion.
The China-US West Coast trade route has seen a particularly high demand, seeing rates soar by 146% YOY, as compared to the 21% increase seen on Asia-Europe routes. Despite carriers reinstating the majority of blanked sailings, demand is still outpacing capacity and an additional GRI was scheduled for mid-September. This rate increase would have been blocked by China’s ban. While the state-owned China Ocean Shipping Company (COSCO) and OOCL canceled rate increases – and Maersk was rumored to follow suit with rate cuts for both US west coast and east coast – most carriers have moved forward with a GRI. That said, the rate increases are lower than anticipated, suggesting China has had some influence.
Preventing Capacity Management
Adjusting capacity is crucial for freight companies to maintain revenue during times of flux. Although it’s anticipated that spot rates will unlikely to continue rising, thus making China’s ban on rate increases trivial, preventing carriers from adjusting capacity could have a significant impact. As the market slows, the inability for carriers to adjust could prevent them from stemming losses. “This would have an unprecedented impact on the market and, more worryingly, potentially derail the carriers’ ability to manage capacity in the face of extreme demand volatility,” said Lars Jensen of SeaIntelligence.
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