After roaring out of the gate at the beginning of the year with container ships sailing full in both directions and rates more than doubling over the last year, demand in the trans-Atlantic trades is slowing as it rounds into the back stretch on the way into the peak season.
Vessel space was so tight in the first half that carriers in the westbound Europe-to-U.S. market were able to reopen annual contracts with shippers to demand higher rates. Shippers, struggling to find space any way they could get it, had no choice but to comply. European demand for U.S. exports was also strong — so strong, in fact, that only the shortage of container equipment could slow it down, in some cases delaying or stalling export orders.
But with a summer lull settling in as orders tail off, the question now is whether U.S. import orders will resume in September and support the carriers’ planned fall rate hikes. The strong first half demand, some analysts believe, resulted largely from inventory restocking rather than resurgent consumer demand. U.S. exports also are likely to slow as European austerity measures kick in following the debt crisis that started in Greece and spread to Spain.
Some economists believe importers who crammed most of their shipments into the first half to avoid potential space constraints this fall may not place more orders now that U.S. economic growth is slowing.
That would be bad news for carriers just finding their sea legs after their worst year in the 54-year history of containerization. When shipments and rates tanked during the recession, shipping lines slashed capacity last year, allowing them to reap the benefits of higher rates when the recovery took off this year.
The capacity cutbacks “certainly improved the supply-demand balance, and when volumes improved this year and ships were full, carriers were able to get their GRIs (general rate increases) through,” said Neil Dekker, editor of Drewry Shipping Consultants” Container Forecaster.
Carriers, whose combined 2009 losses reached some $15 billion, helped their cause by not succumbing to the perennial temptations of chasing market share at any price, choosing instead to manage new and existing capacity through strategies such as slow-steaming and returning idled vessels at a measured pace.
“What has come out of this whole sorry episode of 2008 and 2009 is that the lines understand the importance of keeping control of capacity by only putting sufficient capacity on a trade to do the job,” said Chris Bourne, whose role as executive director of the European Liner Affairs Association ended on Aug. 1. “That really has sunk home.”
Now that they’re profitable again, it remains to be seen whether that diligence will last. Shippers exasperated with the space shortages screamed long and loud, and some carriers are responding by adding capacity.
Hapag-Lloyd is launching an Atlantic Express Shuttle service between Antwerp, Belgium, and New York-New Jersey in mid-September. CMA CGM will upgrade the ship sizes on its Victory Bridge service between North Europe and ports in the South Atlantic, the Gulf and Mexico in October and plans to retain its Round the World and Liberty Bridge services between the U.K. and Savannah.
Combined, the two moves will add as much as 14 percent back into the trade, just as demand is starting to slide. “The fear is that this could well upset the supply-demand balance and have a contrary effect on the freight rates,” Dekker said.
Other carriers remain more cautious about expanding capacity. “The inventory correction we are experiencing this year is not a sustainable part of the market,” said Soren Castbak, senior director of network and product for Maersk Line’s trans-Atlantic services. The Danish carrier is handling temporary surges in demand through what he called “alternative routing options.”
Low inventory levels, he explained, have triggered a temporary increase in demand and continue to do so for transportation that goes above the standard demand level. “We have not seen a structural increase in demand that would cause need for our network to expand,” Castbak said. “If structural demand increases beyond the scope of inventory correction, we are prepared to adjust our services as necessary.”
For now, the rate increases carriers sought in the first half are largely holding. Maersk’s rate increases “have been partly successful, but following the rate decline — specifically during 2009 (when rates bottomed out at less than half their pre-recession levels) — we still have some way to go,” Castbak said.
Maersk Line, which has a GRI scheduled for October, “will also be looking at a series of increases during 2011 to return to a level that allows us to keep investing into this trade and retain the flexibility to react swiftly and effectively to changes in demand,” he said.
While the additional capacity entering the market could provide some rate relief, for now, shippers know the carriers hold the cards. “Rates are going through the roof, and all the carriers have their big smiley faces on,” said Geoffrey Giovanetti, managing director of the Wine and Spirits Shippers Association, which negotiates and manages freight contracts for its members.
The WSSA did not suffer from the first half capacity shortage because it negotiated specific space allocations for its members from each carrier and agreed to surrender the space to other shippers if it did not meet its commitment. “That’s worked reasonably well for us,” Giovanetti said.
But space has been so tight that some carriers have asked the WSSA for higher rates than specified in members’ contracts. “We’ve had some carriers knocking on our doors, saying, ‘OK, boys, you’re no longer paying a lot more than some of these other shippers, so if you want to have your place in line, we need to talk about increases,’ ” Giovanetti said.
In some cases, the WSSA agreed to the increases, “because certainly we’ve been free to go back to the carriers in times past to say, ‘We came to a fair agreement at the time, but the bottom has dropped out of the market and we need to reflect different rate levels to stay competitive,’ ” he said. The WSSA must be flexible in responding to carriers’ demands for higher rates, because it needs to maintain good relations for the next round of contract negotiations.
Joseph Saggese, executive managing director of the North American Alliance Association, said, “Rates in our market are up threefold from where they were at the low point a year or two ago.”
Saggese, whose group of non-vessel-operating common carriers accounts for about 11 percent of trans-Atlantic cargo volume, said the rate now averages around $2,000 to $2,200 for a 40-foot import container, compared with an average of $400 including all surcharges last year.
“For us, the trans-Atlantic is like a plain vanilla market, port-to-port,” he said. “It’s very simple, gray box, N.O.S. (cargo not otherwise specified), as opposed to the trans-Pacific, which is very complicated.”
The outlook for U.S. import demand in the second half of the year will make it tougher for carriers to get the increases they seek. Ships have been running pretty full up until the last six weeks, but Saggese’s NVO members are seeing a lessening in orders.
“Roughly around June we started to see it taper off, level off and then dropping, so I’m hoping this is a summer lull and that in the fall it will come back up again,” he said.
Mario Moreno, chief economist for PIERS Global Intelligence Solutions, a sister company of The Journal of Commerce, doesn’t expect a second half rally. “I see a downward trend in inbound shipments from (Europe) as the U.S. economic recovery is losing momentum and unemployment remains stubbornly high,” he said.
PIERS forecasts U.S. container imports from northern Europe will be flat in the third quarter before declining 9.4 percent in the fourth quarter compared to a year earlier.
U.S. container exports to northern Europe recovered strongly in the first half, mainly because of strong demand from Belgium and Germany. But Moreno said he expects U.S. exports to Europe, after jumping nearly 15 percent in the first half, to slow to much more modest rates of 2.5 percent in the third quarter and 2.8 percent in the fourth.
“Impending austerity measures will weaken European domestic demand,” Moreno said.
U.S. container imports from the Mediterranean region also grew robustly in the first half, but are likely to slow to 6 percent in the third quarter and then drop 1.8 percent in the fourth, “mainly due to a continued weakness in the U.S. housing market that will cut into ceramic tile trade,” Moreno said. “In addition, uncomfortably high unemployment in the U.S. may negatively affect demand for European wines.”
These conditions are likely to carry over into 2011, so Moreno is forecasting imports from the Mediterranean region to fall 1.8 percent next year.
U.S. exports to the Mediterranean region will slow to 6.3 percent and 5.6 percent during the third and fourth quarters after growing by double digits in the first half, according to Moreno’s forecast.
“My assumption is that outbound shipments to Turkey will continue to grow by double digits during the second half of the year mainly owing to strong demand for U.S. cotton,” he said. “Nevertheless, outbound shipments to Spain will begin to sour during the latter half of 2010 and turn negative in 2011 as austerity measures in the country cut demand.”
Contact Peter T. Leach at email@example.com.