The peak season is at hand in the eastbound trans-Pacific, but freight rates are dropping steadily and carriers are pulling vessels from service. At first blush, something appears to be wrong with this picture.
The Drewry Container Rate Benchmark spot rate for shipping a 40-foot container from Hong Kong to Los Angeles during the week of July 16 was $1,636, the lowest level in more than 18 months. Last year at this time, the spot rate was $2,624 per FEU.
This month, the New World Alliance of APL, MOL and Hyundai Merchant Marine said it would suspend its weekly service linking China, Taiwan and South Korea with Southern California.
That comes even though carriers in July and August normally increase their capacity for the spike in cargo volume that occurs each fall as retailers stock their shelves for the holiday shopping season.
The action was taken in response to weak demand and because some freight rates in the eastbound Pacific are “unacceptably low,” said Lamont Petersen, Hyundai’s vice president of marketing. The ports served in the service being dropped will be covered by other alliance services, Petersen said.
The NWA development was followed by an announcement from Maersk Line, CMA CGM and Mediterranean Shipping Co. that their service linking Shanghai, Ningbo and Southern California would not commence this month as planned. Two existing strings would cover those ports, the carriers said.
Industry analysts say the topsy-turvy state of affairs in the largest U.S. trade lane is partly because volume hasn’t grown as anticipated, but it’s perhaps more significant that carriers simply were overconfident in adding capacity in the market this year.
“Carriers can’t claim they are shocked by this,” said Paul Bingham, economics practice leader at transportation and infrastructure consultant Wilbur Smith Associates. “Most of the forecasts said there would be too much capacity.”
The situation echoes problems this year in the Asia-Europe trade, Bingham said. Carriers took on a slew of large, new vessels ordered several years ago at bargain prices. In the Europe trade, where many service contracts are renegotiated every three months, freight rates plummeted.
The big ships introduced there bumped slightly smaller post-Panamax ships into Asia-U.S. West Coast trade lanes, and now rates are dropping steadily in the eastbound Pacific.
Capacity reductions were bound to follow. A spokeswoman for Evergreen Marine noted vessel utilization factors are around 85 percent, according to a recent report from research analyst Alphaliner. “Overtonnage inevitably leads to declining freight rates. When rates drop below sustainable levels, carriers will gradually suspend service strings, starting from the less competitive ones, especially those run by smaller ships with higher costs,” she said.
Most rate reductions in the eastbound Pacific have gone to NVOs that play the spot market. Beneficial cargo owners in April and May had negotiated their annual service contracts with carriers, and they already had favorable rates, said Hayden Swofford, independent administrator of the Pacific Northwest Asia Shippers Association. “A good BCO did well with its contracts,” he said.
Nevertheless, some shippers say carriers are approaching them, unsolicited, with offers of rate reductions. A race for market share among carriers is on in the eastbound Pacific.
Carriers say cargo volume isn’t meeting projections. “Despite some early indications that volumes would start ramping up during the June-July period, we are now seeing a more traditional peak season emerge with volumes expected to improve during the August-October time frame,” said a Maersk Line spokesman in North America.
Actually, cargo volume this year is relatively close to broad industry forecasts. At The Journal of Commerce’s annual Trans-Pacific Maritime Conference in Long Beach in March, industry analysts projected growth of 6 to 9 percent this year in the eastbound Pacific. Imports through May were up 5.5 percent, with the traditionally busy part of the year still to come, according to PIERS, a sister company of The Journal of Commerce.
Sidebar: Slow-Steaming for Surcharges.
Japan’s earthquake and tsunami in March reduced trade with that country, and high gasoline prices this spring and summer diverted consumer spending away from retail merchandise. Otherwise, imports would have fallen into the range projected by analysts.
According to the monthly Global Port Tracker published by the National Retail Federation and Ben Hackett Associates, a 6.2 percent increase in eastbound container volume in 2011 is “still realistic.”
After running flat to slightly down over the summer months, the report said imports from Asia would rebound strongly this fall. The projection is that eastbound volume will increase 10 percent in September, 18 percent in October and 19 percent in November over the corresponding months last year.
That certainly sounds reasonable. Cargo volume in the summer of 2010 was unusually strong as retailers rushed to restock after the 2008-09 recession. And, in response to a vessel capacity crunch and equipment shortages during the winter months, importers shipped earlier than usual last year, and volume actually peaked in August.
So this summer’s weak import numbers are being benchmarked off of unusually strong volumes last summer. But imports in September through November will be compared to relatively weak numbers from autumn 2010.
But the economic conditions are weighing on importers. Dave Akers, managing director of the Toy Shippers Association, said his members are “not excited” about prospects this year, and some are concerned they committed too much volume to carriers in service contracts.
Bingham said there would be a peak shipping season this year, although it probably won’t be intense, with retailers unlikely to engage in late-season inventory building. Many likely are waiting to get a more precise view of the economy in the fall, and that could leave them postponing shipping decisions until relatively late, as they did in 2009 when airlines reaped big gains from companies rushing goods to stores.
In the meantime, however, ocean carriers will have trouble increasing rates in the coming months. “If they’re going to get the rates up, they have to do it now,” he said.
The declining freight rates have been especially difficult for smaller niche carriers, with their higher per-slot vessels to absorb. For the niche carriers to make a profit, industry analysts say, the base freight rate in the eastbound Pacific must be above $2,000 per FEU. With rates now below $1,700, the smaller lines presumably are losing money on every container they carry.
The choice facing all trans-Pacific carriers is whether they should maintain existing capacity to protect market share even though they are losing money, or should pull capacity to stem financial losses.
If they keep the ships in place, the larger carriers believe their near-term losses will be rewarded if they can force the niche carriers out of the trade.
Contact Bill Mongelluzzo at email@example.com.