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Container freight rates crash on China slump

Rates to hire container space to import from China have fallen by 64% in less than three months

The cost of shipping a 40-foot container from China’s Shanghai port to India’s Jawaharlal Nehru Port is now around $300 compared with $850 three months ago. Photo: MintPremium
The cost of shipping a 40-foot container from China’s Shanghai port to India’s Jawaharlal Nehru Port is now around $300 compared with $850 three months ago. Photo: Mint

Mumbai: Export to China, get paid for the shipping.

Shipping lines and agencies that buy container space for resale are offering heavy discounts, and even paying their clients up to $25 per container, as they try keeping customers happy and prevent containers going empty, industry executives said.

The freight rate crash is a throwback to India’s airlines cutting fares as low as 1 to prevent seats flying empty. However, unlike airlines, shipping rates occasionally tip into so-called negative freight category where exporters sometimes get paid to fill the containers that would otherwise travel empty to China.

A sharp decline in trade has led to an overcapacity in the cargo shipping industry. Freight rates have fallen off a cliff as more signs emerge that China’s economy is slowing. Data released on Tuesday showed China’s factory output in August fell to the lowest in three years.

Rates to hire container space to import from China have fallen by 64% in less than three months, officials from shipping lines and freight forwarding agents said. An exporter can ship a 40-foot container to China for as low as $5, two Mumbai-based freight forwarding agents said.

“The collapse in container freight rates is nothing short of a bloodbath. Days are here where shipping lines are carrying containerized cargo for negative freight," said C.R. Nambiar, an executive of a shipping agency based in Mumbai. “In other words, shipping lines are carrying containers to Singapore and China for paying the shipper money anywhere between $10 to $25."

Nambiar attributed the negative freight to the presence of a large number of non-vessel owning common carriers (NVOCC). These entities buy space in shipping lines and resell them to actual exporters. According to Nambiar, NVOCCs are only interested in rotating the containers within a trading area to reduce losses. “They keep moving their inventory at any cost and, in the process, damage the whole freighting discipline," he said.

An executive from NVOCC countered the argument. “Yes, there is heavy undercutting going on to tide over the crisis for now. But the market should not forget that death of NVOCCs will lead to a monopolistic condition dominated by shipping lines," the executive said, requesting anonymity. He was hinting that NVOCCs are checking the dominant position of shipping lines.

Another executive at an international shipping line confirmed shipping rates have crashed more than 60% in the past three months. He requested anonymity.

India’s merchandise exports contracted for the eighth month in a row in July, though at the slowest pace in seven months. Commerce ministry data on 14 August showed both exports and imports contracted 10.3% in July, leading to a trade deficit of $12.8 billion, an eight-month high.

In comparison, China’s exports fell 8.3% in July, its biggest drop in four months.

Though the yuan devaluation has sparked exchange rate volatility and is expected to further erode competitiveness of Indian shipments, the finance ministry in August said it will only have a temporary impact on the rupee as India has adequate foreign exchange reserves.

Freight rates to and from Ningbo, Shanghai and Shenzhen in China are seeing dynamic changes, said Hiren Trivedi, logistics head at freight forwarding firm Royal Forwarders Pvt. Ltd. Trivedi said rates crashed mainly due to the decline in exports from India and imports from China.

Cost of shipping a 40-foot container from China’s Shanghai port to India’s Jawaharlal Nehru Port is now around $300 compared with $850 three months ago, according to two freight forwarding executives quoted above.

Trivedi confirmed that Indian shippers can send an export container for free in many cases. He also pointed out that Indian freight forwarders are receiving so-called kick-backs from their Chinese counterparts.

“Citing the troubled times, Chinese firms are giving kickbacks or incentives of $5-10 in certain cases as a prize for nominating an Indian shipper who is willing to send or receive a consignment," Trivedi said.

Who is benefiting in this?

An executive from a freight forwader located near Jawaharlal Nehru Port Trust said: “The benefit goes to shipper. But where is the cargo?"

He said on condition of anonymity that it’s a double whammy for Indian shippers as there is little cargo to ship out of India and little to bring into the country.

An executive from Container Shipping Lines’ Association, an Indian shipping lines lobby, said rates to China and Europe have crashed more than 50%.

“Shipping lines are going to incur huge losses. I don’t see any imminent revival in the freight rates," the executive said, requesting anonymity.

China is India’s largest trading partner, followed by the US and the United Arab Emirates. The latest data released by the statistics department on Monday showed India’s gross domestic product (GDP) growth slowed to 7% in the April-June quarter from 7.5% in the January-March quarter as measured at market prices.

There are more troubles for China. For China, the Purchasing Managers’ Index (PMI) was 49.7 for August, matching the median estimate in a Bloomberg survey and down from 50 in July. A reading below 50 indicate contraction.

“Unless the overall export volume increases, the situation is likely to continue in this manner. Large agro commodities that normally get traded are at a standstill now—onion, soya, raw cotton, to name a few. Besides, the hard fact is that unless China buys from India, there is no escape for Indian container freight rates," Nambiar said.

“But the scene could be worse, if as a result of the current impasse, a few lines or NVOCCs were to pull out. At present, the ships are sailing largely because of lower bunker or ship fuel costs. It’s time the government takes a serious look at the growth of India’s exports," Nambiar said.

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Published: 02 Sep 2015, 12:59 AM IST
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