Thursday, July 11, 2013

Follow the price leader?



The recent dramatic increase in freight rates from Asia to Northern Europe and the Mediterranean has raised suspicion amongst shippers that carriers are coordination GRI strategy. However, it is a tough call to distinguish between coordinated price setting and following price setters. Last week's spectacular 165% increase in forwarders' buy rates from ocean carriers for spot cargo from Shanghai to Rotterdam, up to $2,622/40ft on July 4, has again sharply crystalized shipper concerns over the possibility of ocean carrier price signalling, and its effect on market volatility. The same applies to the 61% increase obtained from Shanghai to Genoa on 6 June, up to $2,268/teu, which has been followed by another 15% on 4 July, up to $2,564/40ft.
All-in spot rates from Shanghai to Rotterdam ($ per teu)
                                                                                                                                                                                          Source: World Container Index assessed by Drewry

Spot rates from Shanghai to Genoa ($ per 40ft)
                                                                                                                                                                                           Source: World Container Index assessed by Drewry

How the announcement of very similar GRIs with very similar effective dates and very similar amounts is possible in a fragmented market without some form of communication has been worrying the European Shippers' Council for some time, although it has yet to formally raise the issue with the European Commission.
The EU watchdog is understood to already be on the case, however, following an investigation of material acquired during its dawn raids on ocean carriers' European offices two years ago. Although little has since been reported by the EC, industry sources say that price signalling was one of its specific concerns.
The practice of different carriers announcing their plans to raise prices, one after another, is easy to see from the way ocean carriers' GRI's are announced. As shown in Table below, there has been a remarkable similarity in the quantum and effective implementation date of each rate increase announcement from Asia to Northern Europe and the Mediterranean since the beginning of the year. Moreover, there appears to be a pattern in the way that, once the first increase has been announced, others quickly follow.
The practice used to be legal until liner conferences were banned by the EU in October 2008, so many will still be familiar with it. It is also still allowed in most countries outside of the EU, including the US, providing only price increase recommendations are made. For example, the Transpacific Stabilisation Agreement's recent press release on this year's peak season surcharge only refers to a 'guideline' of $400/40ft.
The increases achieved in recent weeks are little different to those obtained by carriers at the beginning of 2012, which, as shown in Figure below, only lasted up to 2Q 12, since when it was mostly downhill for them up to the beginning of June this year – despite several similar attempts to get rates back up (see table 1).  So, whatever price 'signalling' may have taken place in the first half of 2012, it ceased to be effective shortly afterwards, which could happen again now as the market fundamentals of supply and demand are not in their favour.
In other words, although the quantum of the GRIs have been very large, they have ultimately all been cancelled or reversed since mid-2012, thereby negating their net effect on the spot market once rates are averaged over a long period.
Ocean carriers' poor profitability since Q3 12 also points to free market behaviour. Most carriers' financial accounts have been full of red ink, with barely enough profit made to pay interest due on loans, yet alone keep shareholders happy, over which many shippers are sympathetic due to the implications on service quality.
The issue therefore appears to boil down to the way that price signalling or leadership can result in increased market volatility.
According to industry sources, some European shippers are currently being questioned by the EC on the way that their ocean freight rates are negotiated. This would make sense as it needs to be clarified before any assessment of the damage done by signalling can be properly assessed, and remedial action recommended.
Rate increases from Asia to Northern Europe since January 13
                                                                                                                                                                                    Rate increases from Asia to Med since January 13
                                                                                                                                                                                         Our View
Claims of price coordination between ocean carriers are all but impossible to prove, even though price signalling is very apparent. However, in the long run, freight rate levels are determined by more significant factors such as supply, demand and ocean carrier profitability.
Source: Drewry Maritime Research

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