The Tide of Trans-Atlantic Trade

Two decades ago, the Asian economic miracle was just dawning and the Atlantic was still the place to be — a robust market linking the developed economies of Europe and North America. The trans-Atlantic trade was a center of attention as carriers added services, formed or restructured alliances, and battled with cargo interests over regulatory issues.
 

Now Asia is where the action is, and compared with the Pacific, the Atlantic is pacific. “It’s still a major trade, but it is moribund in some respects,” said Neil Dekker, editor of Drewry Shipping Consultants’ Container Forecaster.
 

“A quiet little pond with a lot of activity,” said Joe Saggese, managing director of the North Atlantic Alliance Association.
 

The trans-Atlantic market remains sizable. Just over 3.2 million TEUs moved between U.S. and North Europe during 2008, but that number looks paltry against the 18.5 million TEUs in trans-Pacific volume, and it’s heading downward as economies on both sides of the Atlantic take a beating. The trans-Atlantic also has been surpassed in volume by the Asia-Europe, intra-Asia and Asia-Mideast routes.
 

As a mature trade, the trans-Atlantic has been an island of relative stability for container lines. Unlike most markets, the trans-Atlantic is fairly well balanced between eastbound and westbound shipments — barely 1,000 TEUs of difference in 2008 on the U.S.-North Europe lanes — and carriers can serve it without huge post-Panamax ships. But carriers in the Atlantic are struggling with the same problems faced in other markets — sluggish volume, declining ship utilization ratios and falling rates.
 

“The attention has been focused on Asia-Europe and the trans-Pacific, and the Atlantic has sort of plodded along,” Dekker said. “But it’s starting to feel the pain. Vessel utilization is down, and so are rates.”
 

Trans-Atlantic exports got a boost when the dollar’s value against the euro was at record lows. Now that the dollar has recovered some of its strength and the recession has taken hold globally, exports are down.
 

In its latest updated forecast for the trans-Atlantic as part of its Trade Horizons country forecast issued late last month, PIERS Global Intelligence Solutions, a sister company of The Journal of Commerce, projects the downturn that hit the market midway through 2008 will send the combined eastbound-westbound trans-Atlantic containerized trade down 24 percent in 2009. 
 

The trade inched up 0.2 percent in 2008 on what PIERS measured as a 5.8 percent decline in U.S. containerized imports that was offset by a 6.2 percent gain in exports over 2007.
 

PIERS forecasts a modest recovery of 3.4 percent growth in 2010 but only a 0.9 percent uptick in 2011, leaving the trade lane down nearly 700,000 TEUs on an annual basis from 2007.
 

The market reached the bottom in this year’s first quarter, when U.S. trans-Atlantic exports fell 32.7 percent and imports dropped 23.4 percent on a year-over-year basis, according to PIERS.
 

Bella Foss, president of BRIZ Forwarding in Brooklyn, said she’s seen the impact in shipments to eastern Europe and Russia. “Everybody’s trying to survive,” she said. This trade, much of which is transshipped via ports in North Europe, has shrunk — PIERS measured a 50 percent drop in the first quarter and forecasts a 47.7 percent decline for 2009. 
 

Saggese, whose association represents about 40 ocean transportation intermediaries, said typical Europe-to-U.S. rates have plunged from about $2,200 per FEU in 2007 to the $1,000 to $1,200 range, while U.S. export rates have dropped from about $1,200 to around $650 to $800.
 

He said the decline in rates has put pressure on non-vessel-operating common carriers that buy carriers’ vessel space and sell it to shippers at a markup. With carrier rates plunging, the NVOs’ markup, or spread, represents a much higher percentage of the overall rate. Saggese said shippers are citing that in pressing NVOs for reduced rates.
 

Forwarders and NVOs play a much greater role in the trans-Atlantic than in other markets such as the trans-Pacific. European forwarders such as Panalpina, Kuehne + Nagel and Schenker were vertically integrated long before container ships came along.
 

Shippers and forwarders say all-in rates have fallen by 40 to 50 percent or more since the start of 2008. Most of the cuts are due to bunker fuel surcharges that have dropped with the price of oil, but some result from carriers’ increasingly desperate efforts to gain or hold market share.

Geoff Giovanetti, managing director of the Wine and Spirits Shippers Association, said earlier this year he negotiated what he considered satisfactory rates for trans-Atlantic service. Within the last month, however, carriers have approached him with unsolicited offers for additional reductions.

Giovanetti said he feels compelled to accept the offers, although he wonders how long carriers can survive when quoting “below rock-bottom” rates. “We have some forwarders that we compete with directly, and we know they’ve been given the same offer,” he said. 
 

In a market that’s shown slow growth in the best of recent years, trans-Atlantic carriers face a dilemma. They can’t increase market demand by forcing consumers to buy more goods. And they have limited ability to reduce vessel capacity.
 

On longer, busier Asia-Europe and trans-Pacific routes, carriers have trimmed capacity by eliminating vessel service loops, or strings, or by reducing vessel speeds to stretch out voyages. That doesn’t work as well in the smaller, shorter Atlantic trade.
 

“It’s not as if the Atlantic carriers have multiple strings and can remove one and still have a presence in the trade,” Dekker said. A carrier with a single string of trans-Atlantic vessels can’t eliminate that string without leaving the market, something few carriers have been willing to do. And the comparatively short distances of trans-Atlantic voyages provide few possibilities for slow-steaming, the tactic to keep capacity on the water but to stretch out service and reduce its availability. 
 

Carriers have nibbled at the edges of trans-Atlantic capacity by making changes where they can. Earlier this year, Hamburg Sud suspended a standalone service and chartered space on vessels operated by the multicarrier Grand Alliance. The carrier said it was an effort to hold down capacity in a weak market.
 

Another problem is there is no market where ships can be shifted to operate profitably. During most recent shipping downturns, some trade lanes remained healthy. This economy has battered all regions just as container carriers are coming off a record binge of shipbuilding orders.

Dekker said Drewry forecasts that trans-Atlantic vessel utilization during this year’s third quarter will be 72 percent westbound and 73.6 percent eastbound, a relatively low rate given the many actions carriers have taken to reduce capacity. Fourth-quarter utilization is forecast at 61.1 percent eastbound and 71.8 percent westbound. For the year, Drewry forecasts utilization of 68.9 percent eastbound and 68.9 percent westbound.

Drewry forecasts that overall shipments between North America and North Europe will be down 17.7 percent westbound and 25.4 percent eastbound. These numbers include Canada and Mexico. 
 

PIERS forecasts TEU exports from U.S. ports to North Europe will drop 26.6 percent and that imports will fall 21.5 percent this year from 2008 levels. That will leave the import market down 28.5 percent from the 2006 level. 
 

The relative balance of the market, however, offers some relief to carriers as they try to align capacity and reposition empty containers. PIERS said that last year, trans-Atlantic imports totaled 1,621,214 TEUs and exports were 1,622,619 TEUs.
 

Trans-Atlantic shipments are primarily port-to-port. That’s rooted in geography — stacktrains are ideal for long-distance inland movement of Asian imports via West Coast ports, but inland markets on the East Coast cover much smaller distances.
 

“It’s a very vanilla trade, by that I mean it’s primarily port-to-port, with not a lot of complexity,” Saggese said. “A rate’s a rate and a box is a box and everybody knows the rates.”
 

The roster of trans-Atlantic carriers includes most major global operators, most of which serve the trade through vessel-sharing alliances, which have figured prominently in the U.S.-Europe trade for more than 20 years.
 

The trans-Atlantic “has never been a hugely profitable trade for carriers, at least in the last couple of decades,” Giovanetti said, with many carriers there looking only to complete a round-the-world service or to serve customers whose business is important in higher-volume markets. 

For trans-Atlantic carriers, “it’s still a bloodbath.”  

 

Contact Joseph Bonney at jbonney@joc.com.