Positive Container Rate Outlook

WASHINGTON - Dec 21/17 - SNS -- The USDA thinks container freight rates should remain reasonable throughout the coming year because of significant increases in capacity due in 2018.

In the latest Grain Transportation Report, the USDA's Agricultural Marketing Service argued, "Because of the persistent excess capacity, most agricultural shippers report ocean freight rates have been reasonable this year. Average ocean spot rates for major U.S. transpacific westbound trade lanes increased 6% over the past 12 months ending November 2017. However, with overall slow demand for container service in the United States during the last quarter, some deterioration of spot rates could happen through the end of the year."

The global volume growth in 2017 absorbed some of the excess vessel capacity in the market, but over capacity persists. According to the December Drewry's Shipping Insight report, newly built vessel deliveries in 2017 were stronger than 2016, but still relatively slow.

However, Drewry reports big increases being scheduled for 2018, with the number of vessel deliveries expected to increase 368% over 2017. Drewry reports the following vessel categories as having the largest increases -- Handysize (up 26,000 TEU), Intermediate (up 119,000 TEU), Very Large (up 607,000 TEU) and Ultra Large (up 547,000 TEU). The combined increases in the numbers for these categories is pushing the total container capacity growth in 2018 up by more than 600%.

Agriculture Relies on Containers

U.S. agricultural exporters rely heavily on the containerized ocean transportation industry, which serves the global marketplace that is bigger and much broader than the agricultural sector, as important as it is. In 2016, more than 22% by tonnage and 47% by value of U.S. waterborne agricultural exports moved in containers. From January to September of this year, containerized agricultural exports were just 1%, or 11,881 twenty-foot equivalent units (TEUs), shy of movements during the same time last year.

Shipments started the year strong, up 4% during the first quarter, but second quarter shipments increased by only 1% and third quarter shipments fell 6%. Much of the export losses this year were because of the Chinese import tax on distiller's dried grains (DDGS) shipments and reduced livestock feed demand in Vietnam. The top containerized agricultural export is animal feed (see table), which includes hay, DDGS, and other feed products. Hay exports fell slightly so far this year -- 2% compared with 2016. However, containerized soybean exports have been strong, increasing 23% over 2016.

Typically the last quarter of the calendar year is the busiest for containerized agricultural exports, particularly containerized grain products because of the recent harvest season. However, non-agricultural containerized exports and import cargo typically slow down during the final quarter of the year, as the peak holiday shipping season has passed.

Less demand for container service during the fourth quarter often reduces ocean freight rates, but also prompts carriers to reduce vessel fleet capacity to balance supply and demand. However, this year carriers have not responded in the normal pattern so the usual trends could be altered as the last quarter unfolds.

The major global ocean container carriers have seen a profitable year in 2017. Global container volume has been strong in major trade lanes, particularly the largest global trade lane, Asia-Europe. Carriers have also seen productivity and efficiency gains from the newly restructured vessel sharing alliances, which began in April of this year. However, as the year comes to a close, shipments have tapered, which puts downward pressure on rates and draws attention to vessel fleet over capacity.

This time of year, carriers will traditionally remove excess vessels temporarily from their operating fleet to balance ship capacity with overall volume demand, a practice called "laying up" vessels. However, industry analysts report this year's laying up activities are historically low, saying it is likely the result of a profitable year with solid volume growth. Some analysts also blame the low laying up figures on the largest global ocean container carrier not reducing its fleet capacity in an effort to regain market share lost during a cyber security breach earlier this year.