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02092016 Chinese New Year: A Predictor of Freight Rates - C.H. Robinson's Francois Wolberg Explains Why

2/10/2016
CHINESE NEW YEAR: A PREDICTOR OF FREIGHT RATES - C.H. ROBINSON'S FRANCOIS WOLBERG EXPLAINS WHY

"A trans-Pacific eastbound carrier general rate increase followed months of plunging rate levels." --Francois Wolberg, C.H. Robinson


NEW YORK--The cost of shipping products from Asia to the U.S. continued to rise leading up to the Chinese New Year, in contrast to plunging rates during 2015. Nonetheless, idle fleets and reduced demand could translate to continued lower prices for the next several months.

"The trans-Pacific eastbound carriers saw a general rate increase take effect, following months of plunging rate levels," said Francois Wolberg, director of global textile logistics at C.H. Robinson, a freight transportation and logistics provider. "With the passing of the Chinese New Year on Feb. 7, and with nine rate increases announced by carriers since January 2015, I expect those events to have a big impact on the market."

Indeed, Chinese New Year plays a critical role in determining the short-term cost of shipping products from Asia to the U.S. with an expected run-up in shipping costs ahead of the Chinese New Year, which this year began on Mon., Feb. 8, as companies try to ship goods to North America before factories close and millions of workers take at least a week off to celebrate the holiday.

The trans-Pacific ocean shipping market is by far North America's largest trade lane, accounting for nearly 20 million twenty-foot containers entering the U.S., according to the Journal of Commerce. "The January run up to Chinese New Year is traditionally a busy one for exporters as cargo owners try to ship their products out of the country before the three-week factory shutdown and carrier service deletions, and space on container ships is often at a premium," states the Journal of Commerce.

In fact, the Shanghai Containerized Freight Index (SCFI), an index operated by the Shanghai Shipping Exchange, tracks spot rates (not contractual rates) of shipping containers from Shanghai to 15 major destinations around the world, posted increases during January and saw spot rates from China to the West Coast grow.

"The overall effectiveness of general rate increases [as a predictor of shipping costs] mainly stems from carrier use and market capacity," explains Wolberg of the Chinese New Year effect, which takes many freight carriers out of service, thus decreasing capacity and increasing prices. "As carriers' space usage climbs--which typically occurs during peak season and prior to the Chinese New Year--the chance of a general rate increase sticking is more likely. Conversely, as carriers' volumes decrease, so do the utilization levels--if all else remains constant--and carriers reluctantly reduce rates in order to drum up business. This reduction takes a toll on carriers' overall profitability, so general rate increases are announced in order to add stability."

Nonetheless, freight ships have continued to add capacity, even last year during a  tumultuous time for the container business, which saw spot rates collapse and prices sag leading to market volatility. 

"Carriers are going to need to manage this oversupply. The idle ship capacity soared from 230,000 twenty foot containers at the beginning of 2015 to 1.36 million by December," Wolberg said. "The unused fleet was expected to top the all-time high of 1.5 million recorded in December 2009, but moves by shipping companies to scrap their older tonnage prevented that from happening."

"Still, without an increase in volumes following the Chinese New Year holiday, it's possible we won't see any reduction to idle fleet until April," Wolberg said. "Carriers are optimistic that strong forecasting from their [import] customers will likely lead to higher usage and increasing prices. However, if volumes diminish following the Chinese New Year, with the overcapacity in the market, we could see the continuance of rate volatility leading to price instability." --Lisa Vincenti

Editor's Note: To read more from C.H. Robinson on this topic, read their blog post here.

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