February 9, 2010
Carriers under economic distress are appealing to the mercy of shippers, but it's not having the desired effect.
The Transpacific Stabilization Agreement, a discussion group of 14 container lines that carry U.S. imports from Asia, announced Wednesday that its members will ask customers to tear up their recently-signed contracts and accept a $500 rate increase.
TSA’s voluntary guideline, if implemented, would represent a 50 percent increase over service contract rates that are reportedly $1,000 per-FEU or less. TSA’s rationale is that the existing rate levels in the eastbound Pacific are non-compensatory and could result in lines going out of business.
Reaction from the shipper community and industry analysts was swift. Andrew Traill, a London logistics consultant who publishes the “Voice of the Shipper LLP,” said shippers view the carriers’ financial plight as a result of “the lines’ mismanagement and arrogance towards their customers over many years. I would be amazed if many shippers agreed to renegotiate contracts.”
No one doubts that carriers are losing money not only in the trans-Pacific, but in virtually every trade lane they serve. The “Container Forecaster” published by Drewry Shipping Consultants of London projected a global decline in container volume of 10.3 percent in 2009, followed by only a 1 percent increase in volume next year.
Neil Dekker, editor of the “Container Forecaster,” said liner companies are “looking at a $20 billion black hole” this year.
At issue here appears to be the ability of shipping lines to convince customers that if they do not pay increased rates, carriers will further downsize their services to save money, and shippers will face capacity constraints.
If the problem persists, bankruptcies and an unhealthy level of consolidation in the liner shipping industry are inevitable, carriers maintain.
TSA members include APL, China Shipping, CMA-CGM, COSCO, Evergreen Line, Hanjin Shipping, Hapag Lloyd, Hyundai Merchant Marine, "K" Line, Mediterranean Shipping Co., NYK Line, Orient Overseas Container Line, Yangming Marine Transport and Zim Integrated Shipping Services.
Contact Bill Mongelluzzo at bmongelluzzo@joc.com.
TSA didnt drop the rates, it was independently done by their members. Overcapacity with less freight caused panic amoung carriers. Now that all is signed and looking forward, they realized there is no profit to be seen until 2010. Unless measures are taken, such as the recently filed "Rate Restoration," carriers will fall.
Hapag is meeting with investors to ask for money to hold them over.
http://www.bloomberg.com/apps/news?pid=20601100&sid=afR1iK9jCH.Y
Evergreen selling 30 old ships, Korea buying ships from its two carriers. Measures are being taken, but the fight for cargo has drawn too much blood.
Personally, I think there are too many carriers. If there is no profitability, no one will further invest to replace those ships you speak of.
This is a classic case of Darwinism Economics 101.
'Only the strongest carriers will survive. Shippers would be foolish to agree to increases when they have signed contracts. Carriers will have to continue cuttting costs by implementing efficiencies, expiring long term charters, and re-negotiating new charter rates at a much lower cost.
One carrier that stands out in all this mess is MSC. They are actually taking on more capacity, not less. MSC has signed some very competitive charter agreements and have reduced their overall cost base. While MSC does not publish financial statements, it is doubtful they will be profitable this year. However, the strategic decsions they are making now will strengthen their position when the economy recovers. Unlike, #1 Maersk, MSC has never bought another carrier, and therefore, has never had to deal with the heavy cost systems integration or redundencies.
Chances are there will be a top 10 victim in all of this. However, the importer at the conference in L.A. is quite right that with so much excess capacity, the void will quickly be filled.
to Kingston4811:
The overcapacity is in terms of number of vessels, and the overhang is mainly between "pure" owners (those that don't operate their ships) and carriers, not between carriers and owners of cargo.
The inter-continental carriers are still very limited in numbers and concentration is very high. The disappearance of one of the top-10 carriers would result in an immediate withdrawal of 3.5% (Number 10 Hanjin) to 18.5% (Number 1 Maersk) of East-West operated fleet. Those vessels would not be purchased by another operator before a while...
This would be a rather significant shift.
At the TPM in Los Angeles in March I happened to be sitting in front of a group that included the "decision maker" for one of the top 5 importers in the US. The discussion among the group revolved around the doom and gloom which we were hearing from the podium from speaker after speaker. Someone noted that there would be "failures" by some carriers, and this gentlemans response was "it doesn't matter, I'll get all of my freight covered; when they go out of business the ships don't sink, someone else will buy them". There isn't much more to say about that; maybe somehwta short sighted in that the carrier who goes out you may have to replace, but in todays world ovf overcapacity that wont be a problem. So the TSA action isn't likely to have any real impact; they should have thought of that as they dropped the rates 50 to 60%, not afterward.
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