Commentary: Container Carriers at a Crossroads

Container lines this year accomplished something few thought they could: They drove home a series of rate increases on the major east-west trades that returned the industry to profitability.

As Macquarie’s Janet Lewis wrote in an Aug. 29 report, “The industry has been uncharacteristically restrained on supply addition YTD in an effort to push freight rates up to a more reasonable level after incurring massive losses in 2H11.”

But that chapter is over and a new one has begun. Now, as before, few expect carriers can prevent rates from plummeting as they confront a slowing global economy — Asia-to-Europe volumes fell 7 percent in June — and an influx of massive new vessels.

Also as before, though, Maersk Line and other carriers profess a determination to avoid such a scenario. Given that carriers this year have been talking in terms not often heard in the past — expressing satisfaction with their current levels of market share, for example — it’s worth noting the possibility that the lines have turned a psychological corner and can figure out a way to avoid another bloodbath.

In other words, carriers have arrived at another fork in the road. Which way will they go?

For now, things are headed south. Lars Jensen of container shipping industry analyst SeaIntel reported last week that discipline in the Asia-Europe and trans-Pacific trades has gone to the wind. “The underlying rate erosion — and hence daily price discipline across the carriers — is now at a level much worse than seen during the rate war in 2011,” he wrote. “The rate decline seen in Asia-North Europe in the past 4 weeks is unprecedented in the history of the spot rate index.”

In the past three weeks, the Shanghai Container Freight Index for Asia-Europe rates has slipped 22 percent, from $1,800 to $1,400 per 20-foot-equivalent unit.

Johnson Leung, senior vice president of transport analysis of Jeffries Group in Hong Kong, who had admired carriers’ efforts earlier in the year to restore profitability, downgraded the container sector last week, noting an accelerating downward trend in rates in the Asia-Europe and the trans-Pacific trades. “Container freight rates are likely to come under further pressure,” he wrote. “Volume has been poor since July, which has made industry sentiment too weak to absorb additional capacity.”

Lewis, who also turned negative on the container sector, said, “Although carriers have done a tremendous job in controlling capacity YTD, we believe cracks have started to appear.” She cited the recent introduction of a weekly Asia-Europe service by Evergreen and Hanjin that adds 9,160 TEUs of capacity a week, or 2.6 percent of total capacity in that market, using newly delivered vessels.

Despite that and the negative impact Lewis says it had on the spot rate, carriers haven’t given up on salvaging the year, even as rates seem to be slipping rapidly out of their control. The G6 Alliance announced an earlier-than-normal winter deployment for early October, with one Asia-Europe string coming out, and the CKYH alliance announced the early withdrawal of services in October, Lewis said.

Maersk says it will announce its own capacity withdrawals this fall. In a recent Hong Kong press conference, Maersk CEO Soren Skou said “significant” capacity withdrawals are coming, as is a “significant” rate increase on Nov. 1, normally the beginning of the slack season, HKSG Group Media reported. That could be important; Jensen says carriers this year are proving to be disciplined in implementing rate increases but completely undisciplined during periods in between increases.

Are the carriers withdrawing enough capacity? Analysts believe not. “With demand deteriorating and more capacity being delivered, carriers will need to be more pro-active into Q4 to prevent another collapse in rates this year,” Lewis wrote, citing an Alphaliner estimate that at least five more loops need to be pulled from the Asia-Europe trade in the next two months to bring the market back to balance.

Skou told the Hong Kong press conference that Maersk was content with its 15 percent worldwide market share, a point he has made before. Earlier in the year, Maersk said it would not increase capacity in any trade lane beyond the expected growth of that market, another way of disavowing interest in market share gain.

Other large carriers have made similar statements this year. Market share is the key to instability. Carriers drop rates in part to defend or increase their market share, but if they’re market share-neutral, there is less reason to chase rates downward.

Still, whether or not carriers can evolve to a culture of trust on the question of market share, they will automatically chase rates downward as they have for years. At least some carriers certainly would like to see this dynamic change. But as new ships come on line — and with them carriers’ need for cash flow — agendas among the carriers tend to diverge dramatically.

And that only undermines stability.

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him at twitter.com/PeterTirschwell.
 

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