New Winds Blowing

As the industry gathers in Long Beach this week for the 12th Annual TPM Conference, shippers face a more complex outlook in the trans-Pacific than just a few weeks back. Belatedly after sitting on the sidelines as rates contracted for much of last year, carriers — realizing a repeat of 2011 would be the likely outcome absent intervention on their part — have swung into action.

By pulling capacity, carriers are doing exactly what analysts said they needed to do last year to salvage the market in the face of a glut of new capacity set to arrive this year. After watching an estimated $5 billion in losses pile up last year, carriers have started taking the harsh medicine of laying up ships.

Maersk Line, whose actions are seen as a bellwether for the industry, set the time for this shifting landscape by announcing on Feb. 17 plans to withdraw 9 percent of its Asia-Europe capacity. Maersk Line’s new CEO, Soren Skou, said the move would have the carrier “growing with the market and restoring profitability,” a striking shift in tone from most of 2011 when Maersk was advising competitors to “start questioning whether it’s a good idea to keep competing” given the financial muscle that would allow it to withstand a protracted rate war.

Even before the Maersk announcement, idled capacity was piling up. Industry analyst Alphaliner reported on Feb. 20 that 288 ships representing more than 806,000 TEUs — 5.2 percent of the global fleet — had been sidelined, a tenfold increase since last June, when the idled capacity count hit a low of 75,000 TEUs.

Maersk also will “consider additional opportunities to reduce capacity, including redelivery of time-charter tonnage, the use of lay-ups and slow-steaming,” Skou said. And, in a coda to its announcement, Maersk said it won’t exercise the option on the final 10 of 30 18,000-TEU Triple-E ships.

What this means for the market is unclear, but a Feb. 20 e-mail sent by a Shanghai forwarder advising customers of a $750-per-TEU general rate increase from China to the Mideast and Europe seemed to say it all. “We don’t know (if) they will do it really or not,” that message said.

Analysts say carrier losses, which they see continuing as of early 2012, are forcing carriers to adjust the supply side, and this will impact rates.

As Goldman Sachs’ Tom Kim wrote on Feb. 13: “Even after the recent rebound in spot rates, we believe carriers remain loss-making and will only return to profitability midyear when rates rebound to profitable levels. After four to six quarters of losses, we think the industry will have to lift rates this year, given the deterioration in balance sheets. Unlike (in the second half of 2009 into the first half of 2010), we do not expect demand to bounce back and drive rate restoration. Our thesis is based on supply discipline, which we continue to see through increased idling and delays in newbuild deliveries.”

Jefferies analyst Johnson Leung told The Journal of Commerce: “We turned positive about the outlook for container liners this year after being very bearish about container shipping last year. The huge losses sustained by the carriers in 2011 and ever-higher bunker prices have left the carriers with little choice but to scale down their operation.

“Volume to the U.S. should see much healthier growth, but volume to Europe could become weaker than last year,” Leung said. “All this capacity rationalization allows us to give benefit of doubts that the carriers may turn around this year.”

London-based Drewry Shipping Consultants takes a more cautious view, picking up on a comment in a recent Alphaliner newsletter that Maersk’s 9 percent capacity cut may turn out to be around 4 percent.

“If Maersk’s move represents a genuine removal of capacity from the Asia-Europe trade, then this will help lift rates. It may encourage other lines to follow suit in order to bring about the much-needed correction in supply-demand balance,” said Martin Dixon, research manager for Drewry’s Container Freight Rate Insight report. “However, it is not clear from Maersk’s press statement if this is indeed the case and hence whether the announcement heralds a step change for capacity and ultimately freight rates.”

For shippers attempting to size up the market in advance of service contract negotiations, there are opportunities and danger signs in this year’s outlook. On the one hand, carriers have a poor track record of implementing announced rate increases and, despite capacity withdrawals, the lines are still looking at a year in which capacity could expand by more than 8 percent, far higher than the likely demand. On the other, shippers ultimately need capacity and rightly get worried when carriers start sidelining tonnage.

They remember early 2010, and those bad memories will guide more than a few negotiations this year.

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

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