For ocean carriers, the disquieting chatter began in early spring. All the new capacity they had delayed taking delivery of during the 2008-09 recession was coming due. The inventory rebuilding and consumer optimism of 2010 and early 2011 was waning. Signs they were returning to their old habits of chasing market share over profits were building.
Add it up, and it’s easy to see why rates have been on a steady decline since February.
The situation is especially precarious in the Asia-Europe trade, where an infusion of capacity threatens to snap the fragile balance between supply and demand. Carriers and industry analysts obsess over the Asia-Europe route because, along with the trans-Pacific, it boasts the biggest cargo flows, the biggest ships, the biggest profits — and the biggest losses when the market sours.
Carriers likely will make money or break even in the Asia-Europe trade in the third quarter following scant earnings, or in most cases losses, in the first half of the year. But it will be a close call for lines with above-average exposure to the spot market, where freight rates could fall further even as demand rises.
While the industry is prepared for a lackluster peak season on the big ticket Asia-Europe and trans-Pacific routes, carriers are doing good business on smaller trades where traffic and rates are exceeding expectations.
“Freight rates for Africa and South America and on trans-Atlantic routes are sound, but very low on routes between Asia and North Europe,” Maersk Line CEO Eivind Kolding told German newspaper Frankfurther Allgemeine Zeitung.
Carriers also are luring new cargoes, particularly commodities, into containers. Maersk and CMA CGM are among the carriers to launch new services to Africa or to add ships to existing ones in recent months to keep pace with double-digit growth in Asian shipments of sugar, rice and palm oil. Interbrau, a Hamburg-based trader, ships 10 percent of its French barley exports, some 100,000 tons a year, in boxes and is looking to containerize shipments of other cereals.
But these successes provide limited respite from volatile Asia-Europe rates that feed straight through to carriers’ bottom lines.
Maersk, the world’s largest carrier and holder of an industry-best 15 percent share of the Asia-Europe market, blames softening rates on a rash of tonnage introduced in April and May that forced some carriers to fill the extra capacity on the spot market.
But Kolding is confident about trading conditions in Maersk’s largest market. “It’s not a long-term problem, but a problem for this year,” he said.
Related: Road Narrows for Shippers.
Carriers can take solace in the fact that rate erosion on east-west routes is supply-driven, so they can restore stability by idling capacity, as they did so successfully during 2009’s downturn. That’s not on the agenda yet as the largest carriers are determined to protect and build their market shares, but there are signs medium-sized carriers are considering service reductions in a bid to stem losses.
Still, cargo demand is proving surprisingly resilient. Even with the lackluster spring, forecasts call for 6 to 8 percent volume growth this year, down from about 11 percent in 2010 and just enough to mop up the extra capacity coming on stream across the global liner network. In the trans-Pacific, JOC Economist Mario Moreno’s latest forecasts call for 4 percent growth in imports but a strong 11 percent in exports. And Port Tracker, the monthly analysis of U.S. containerized imports expects volume to be flat through July before picking up in August and accelerating through September and October.
But the steady slide in spot freight rates — $849 to ship a 20-foot container from Shanghai to northern Europe by the end of June, the lowest since July 2009 and down from a peak of $2,164 in March 2010, according to the Shanghai Container Freight Index — reflects the gnawing glut of capacity hindering carrier efforts to push through planned rate hikes and peak-season surcharges.
Plunging spot rates don’t hit carriers equally because the largest lines transport the bulk of their traffic on long-term contracts signed when the market was more buoyant. But the spot market is sufficiently large on the Asia-Europe trade to affect the industry’s bottom line, particularly because the large carriers are determined to consolidate and expand their market share.
This is in marked contrast to last year, when carriers were taking out capacity in a bid to shore up freight rates.
Not all analysts are gloomy about near-term prospects. Morgan Stanley, for one, says fears that planned rate increases and peak-season surcharges won’t stick are “exaggerated.” Demand typically grows 10 percent in July-September, and, with capacity set to increase just 2 percent over the second quarter, carriers should enjoy 95 percent load factors.
But carriers are starting to pull services amid reports that Asia-Europe rates are bobbing just above zero after stripping out bunker surcharges. Taiwan’s Wan Hai Lines and Singapore’s Pacific International Lines, two smaller carriers, blinked first, suspending two jointly operated Asia-North Europe loops and chartering space from Chinese carrier Cosco.
Mainstream carriers also are expected to reduce capacity in the coming weeks following the decision of the CKYH alliance of Hanjin Shipping, Cosco, Yang Ming and “K” Line to suspend one of its five Asia-North Europe strings in early July. The idled nine-ship NE5 service accounts for some 20 percent of the consortium’s capacity and about 2.5 percent of slots on the route.
Carriers aren’t panicking, at least not yet, because leading indicators suggest the market needs only minor tweaks to stabilize conditions on east-west routes.
Idle tonnage, which hit a record 11.7 percent of the global fleet in December 2009, has shrunk to just 0.5 percent, or 63 ships of a combined 80,000 20-foot equivalent units, at the beginning of June, according to container market analyst Alphaliner.
Meanwhile, container prices and leasing rates have touched record highs, and utilization rates have hit 99 percent. Textainer, the world’s biggest container lessor, said it is getting rate increases on expired leases for the first time. Residual values also are at a record high, allowing the company to sell containers today for more than it paid 12 years ago.
The charter market also has held up through the freight rate sell-off because of unquenched carrier appetite for a dwindling supply of tonnage to keep pace with relatively buoyant cargo demand. The market turned a few weeks ago, but there has been no dramatic decline in rates; a 4,250-TEU ship was getting $26,281 a day in late June, down from $26,840 at the end of May, according to the Hamburg Shipbrokers Association.
For now, carriers can afford to wait out the challenging conditions on the Asia-Europe and trans-Pacific routes, because they are sitting on a multibillion-dollar cash cushion following record profits in 2010.
And even as they consider capacity cuts to prop up rates, carriers are spending billions on new ships — more than $6 billion in June alone — to keep pace with industry leaders, particularly Maersk, which raised the bar in February with a $1.9 billion contract for 10 18,000-TEU ships, the world’s largest, that will hit the Asia-Europe market in 2013-14.
The Danish carrier applied more pressure on its rivals last week by ordering 10 more 18,000-TEU vessels, also set for the Asia-Europe trade.
Hanjin unveiled an $846 million order for five 13,000-TEU ships on the same day in June it announced the suspension of the NE5 service. Other orders signed in the month included NOL’s $1.54 billion contract for 10 14,000-TEU and two 9,200-TEU vessels and the upgrading of the capacity of 10 ships ordered last year to 9,200 TEUs from 8,400 TEUs. German charter owner Peter Dohle is investing $1 billion on eight 10,000-TEU units. And New York-listed charter owner Seaspan signed a contract with a Chinese shipbuilder for seven 10,000-TEU ships, with options for an additional 18 sister ships in a $2.5 billion deal.
These ships will join 147 ultra-large container ships due for delivery over the next four years, according to Alphaliner, which expects the order book to swell by another 50 by the end of 2011.
The remaining seven companies among the top 20 carriers that haven’t ordered vessels above 10,000 TEUs are under mounting pressure to join the big-ship market if they want to survive in the Asia-Europe trade alongside rivals with much lower unit operating costs.
The big draw, of course, is economies of scale. Alphaliner said the slot costs of a 13,000-TEU ship operating in the Asia-Europe trade is approximately $150 per TEU lower than an 8,500-TEU vessel and $250 less than a 6,500-TEU unit. And the gap is set to widen. Maersk says the unit operating costs of its 18,000-TEU ships will be 26 percent lower than today’s largest vessels. They will also be 35 percent more energy-efficient than ships being delivered to rival carriers in the next two to three years, it said.
France’s CMA CGM, the world’s third-largest container carrier, responded to the threat of an even more competitive Maersk by boosting the capacity of three 13,800-TEU ships on order to 16,000 TEUs. It also might order ships up to 18,000 TEUs, CEO Jacques Saade said.
Second-ranked Mediterranean Shipping, which narrowed the gap with Maersk over the past 12 months, also is likely to order larger ships than the 14,000-TEU vessels that lead its fleet.
Maersk insists it won’t have any problem filling its 20 18,000-TEU behemoths with cargo, and said they will “further its dominance in the trade.” The Danish carrier, which claims 18 percent of westbound Asia-to-Europe traffic, said it has 100 ships in the trade, giving it considerable flexibility to take out smaller vessels and keep the 18,000-TEU ships fully utilized.
The arrival of the first of the Maersk giants in 2013-14 will coincide with a surge of capacity across the global liner network. Deliveries will top 2 million TEUs in 2013 if charter owners and carriers exercise all options and planned orders, significantly above the record 1.6 million TEUs shipyards delivered in 2008, according to Alphaliner.
This supply surge, even at healthy global trade growth rates, points to a massive shakeout on the major liner routes, particularly Asia-Europe, where some carriers are sure to fall away. This likely will lead to renewed consolidation among the top 20 operators, resulting, in time, in a select group of mega-carriers competing on the main east-west routes.
Today’s freight rate woes could turn out to be a sideshow compared to the looming battle for market share.
Contact Bruce Barnard at email@example.com.