Drewry Shipping Consultants is forecasting that many ocean carriers will struggle to break even this year because of plunging rates on east-west trades and escalating costs.
In the latest issue of its quarterly Container Forecaster, Drewry predicts east-west freight rates excluding fuel will fall 13.2 percent in 2011.
It said that unless the rate erosion that began in the fourth quarter of last year and continued in the first three months of this year is checked, "a number of lines" could suffer losses, at least in the short term.
By The Numbers: Container Rate Benchmark
Drewry's latest forecast of short-term losses is a change from its December forecast, when it predicted that container shipping industry-wide profits will be reduced to $7 billion or $8 billion this year, down from the $19 billion bonanza of 2010. If carriers start to lose money this year, "it would mark possibly the shortest business cycle container shipping has ever seen," Drewry said.
The Container Forecaster said freight rates on the core east-west headhaul trades have been in decline since hitting their highs in August of last year. It attributed the decline in rates to the large amount of vessel capacity that is being delivered this year and the fact that carriers have not suspended as many services during the winter months.
"This is certainly not due to any inherent weakness in demand," said Neil Dekker, editor of the Container Forecaster. He is projecting that volume on the trans-Pacific trade will grow 8.8 percent on the eastbound headhaul leg this year, and 9.1 percent on the westbound leg.
Dekker said an excess of supply and an "unfortunate return" to the carrier strategy of chasing market share has led to spot rates in the trans-Pacific and Asia-Europe trades falling as much as 40 to 50 percent during this period.
On the trans-Pacific trade, vessel capacity will increase 15 percent on the eastbound leg in the second quarter from the same quarter last year, and 15.2 percent on the westbound leg. At this rate, vessel utilization in the third quarter of this year will drop to 87.5 percent on the eastbound leg and 46.1 percent on the westbound leg, Dekker predicted.
"There is a serious risk that unless spot rates recover in the next four to six weeks, recently signed annual rates in the eastbound trans-Pacific might be above the spot market, which will lead to re-negotiations," Dekker said.
In addition to low freight rates, the increase in bunker fuel prices to $650 per metric ton means the bunker surcharge of current Asia-Europe spot rates will contribute only $200 to $300 per 20-foot equivalent unit.
The Forecaster warned that carriers will have to get away from "all-in" pricing on the Asia-Europe trade "in the short term if they are not to lose substantial revenue in the next few months."
Drewry said the prospect of weaker carrier financial statements is not connected to a lack of global demand, which it forecasts will rise 8.3 percent in 2011.
Rather it is vessel overcapacity that could lead to losses, the Forecaster said. Because of overcapacity, it predicts headhaul utilization during July-August peak season will fall below 90 percent.
"This will not help the implementation of any planned carrier GRIs or peak season surcharges," Dekker said. "The market is clearly out of kilter and a correction is required."