US economic slowdown, surging oil prices and increasing supply of shipping vessels combine to trigger critical correction After months of showing a relentless surge, ocean freight rates for cargo being traded from the country finally seem to be easing up. While freight rates for container and bulk cargo to a number of destinations had as much as doubled over the last six months, the market has now largely stabilised and may even witness a downward correction over the next few months, say industry players. Slowing North American demand, a sharp uptake in crude oil prices and increased supply of shipping vessels are said to be the major reasons for this stabilisation. The segment that has borne the brunt of rate revision has been tanker operations. "Tanker rates have come down from the dizzying heights they were commanding a few months back," admits Sabyasachi Hajara, chairman and managing director, Shipping Corporation of India (SCI).
"As oil prices have jumped significantly, demand from the North American market has slowed and this has resulted in drop in tanker demand globally. However, we feel prices are still healthy."
The drop in tanker demand has translated into a significant plunge in revenues for shipping companies. For the government owned SCI, earnings from tanker operations (which contribute 60 per cent of the company's total revenues) have fallen by 40 per cent over the last six months.
Reason: Over tonnage, or excess vessel capacity to the extent of about 30 per cent.
Freight rates for container cargo too are now stabilising and in some cases, have shown a marked downward revision. The cost to ship a twenty foot equivalent unit (TEU) container to the US has almost halved from $2000 in June to $ 1,000-1,100 currently.
"Since the American economy is witnessing a slower growth, rates on that sector are expected to stay low and maybe even fall further," notes Julian Bevis, area line and operations manager (South Asia), Maersk Line- the world's largest container shipping firm.
"Meanwhile, trade between India and the Far East is growing very rapidly, but with many carriers entering the market on that route, prices there too are likely to remain the same."
Similarly, rates to ship containers to West Asia - which rose over 100 per cent from $ 250 per TEU in June to $ 550 per TEU in August - are also likely to now remain stable, says Bevis.
While prices on a large number of routes are expected to remain stable or drop, some routes that may witness upward rate movement are inbound container rates from China and Hong Kong to India. Exports to Europe, too, are likely to remain strong and harden freight rates on the route.
Going forward, shipping companies are likely to modify their strategies to deal with the contraction in shipping rates. Says Mayur Gandhi, chief financial officer, Schenker India, an integrated logistics provider, "In the days to come, the effort of shipping lines will be to move towards long-term contracts where there are stable revenues rather than the short-term contracts that have been popular in the era of rising rates."
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