If there is, as ocean carriers say, too little demand for freight space and too much capacity on the water, Sheila Hewitt is wondering why her shipping customers in the U.S. are seeing cargo containers “rolled” off ships in China while access to export containers is stalled on the other side of the Pacific Ocean.
“We’re just short of a crisis with the rolling and bumping of containers,” said Hewitt, vice president, international, at Transplace, a Dallas-based logistics provider and non-vessel-operating common carrier. “There’s a consensus that we’re in an overcapacity environment, but currently that’s exactly the opposite of what we’re experiencing.”
In fact, Transplace’s customers have been complaining their containers have been denied boarding at a port in northern China since the shutdown of Chinese factories for the Golden Week holiday in the first week of October. Carriers told her the shortages are a temporary hangover from the national holiday when they took out some capacity to accommodate the shutdown of Chinese factories, followed by the suspension of some trans-Pacific services for the slack winter season.
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But the sudden difficulty in securing space on the trans-Pacific indicates carriers are beginning to cut back on the glut of global capacity that has sent freight rates to lows last seen in 2009 in the middle of the Great Recession. “We’re seeing lower rates on Asia-Europe and the trans-Pacific than we saw in 2009, and dramatically higher fuel costs,” said Ron Widdows, senior adviser to Neptune Orient Lines, who stepped down as its president and CEO on Oct. 1.
Widdows, speaking at the annual Textile and Apparel Trade & Transportation Conference in New York last week, said the low rates already threaten to affect the trans-Pacific contract negotiations that typically begin in early spring, and carriers already may be taking action to minimize the fallout.
Sidebar: Load Factors Tumble
Erxin Yao, president of OOCL (USA), said carriers already have withdrawn 10 percent of their trans-Pacific capacity since September. He likened the financial pressures at container lines to those in 2010 when carriers, hit hard by the downturn in 2009, idled hundreds of vessels. “My guess is,” he told attendees at the textile and apparel conference, “we are going to have to see ships laid up.”
Importers already are seeing the impact.
The Shanghai Containerized Freight Index for movements from China to the U.S. West Coast increased in the last week of October for the first time since mid-August. And although rates on other big east-west lanes were still in decline — and in something like freefall on Asia-Europe lanes — the move to restrain capacity was evident.
Shippers say they’re seeing the impact on their operations, as well. “They said it was only to last a week or two, but we’re into week four now, and our customers don’t have the inventory flexibility to absorb any delays,” Hewitt said.
She said this is making it difficult for Transplace and its customers to plan for shipments. “I thought we all learned a very valuable lesson in 2009 and 2010,” she said, referring to the aftermath of the recession when carriers had idled about 10 percent of the global container fleet and couldn’t put those ships back to work fast enough to meet surging demand.
Sidebar: Capacity for Contracts
“In the last few weeks, the shortage of capacity is starting to resurface and I’m having conversations with carriers that are very similar to what I had back then,” Hewitt said.
Widdows said capacity reductions are “unavoidable” because of the economics. “My company has done that.” He said shippers will see more reductions in the short term, but not yet to the extent they occurred in 2009. In the longer term, by the time shippers sit down with carriers to discuss contracts on the trans-Pacific for the 2012-13 season, there may be deeper capacity cuts. To support freight rates on the major east-west trade lanes, carriers will have to idle at least as much as the 1.5 million 20-foot equivalent units they parked during 2009, he said.
Maersk Line forecast a full-year loss in its container shipping business after reporting a third quarter loss of $297 million last week. “In the container business, we are hit by very low rates,” A.P. Moller-Maersk CEO Nils Smedegaard Andersen said. “There has simply been too much capacity in the market, and there still is.” He said capacity would need to be taken out of the market for rates to recover. The market is likely to stabilize when some smaller and less financially solid shipping companies quit the business, he said.
Carriers already have cut 23 services from the main east-west trade lanes with a total of 606,950 TEUs during the spring and summer of this year, according to Drewry Shipping Consultants. Of this, 18 services with capacity of 445,100 TEUs were cut from the trans-Pacific, and five services with 161,850 TEUs of capacity were cut from the Asia-Europe and Asia-Mediterranean trades.
Freight rates tanked on the east-west trades this year because of the huge new vessel capacity being delivered. Scheduled deliveries of new vessels would add 1.28 million TEUs of capacity to the global container fleet this year and 1.44 million TEUs in 2012, according to research analyst Alphaliner. Most of the new ships will have capacities of 10,000-plus TEUs and will be deployed on the Asia-Europe trade, cascading smaller, less-efficient ships onto other trades.
Widdows said carriers had no choice but to order new ships because soaring bunker fuel costs put a premium on the operating efficiencies of newer vessels. But the result will be a troubling transition period for the next few years as carriers work in the newer ships while operating older vessels.
“There will be too many ships and low demand,” Widdows said. “It just can’t go on. Desperation will eventually kick in, rates will shoot up like they did before and you’ll be surprised.”
If the carriers can’t come to grips with the existing and pending 2013 overcapacity, it’s hard to see how they can avoid the continuing decline in global freight rates that have plunged most of them into the red this year and led them to forecast full-year losses. Their losses won’t be as bad as in 2009, when they lost an estimated $19 billion, according to Drewry, but they will mark the shortest cycle of downs, ups and then downs again in the 55-year history of the container industry.
Although industry losses can only be estimated because some major lines are closely held and don’t publish earnings, carriers could lose as much as $5 billion this year after earning estimated profits of around $17 billion in 2010, in between the two down years.
Carriers blame low freight rates and soaring fuel costs for their losses, but the discounting resembles the rate wars they waged at the beginning of 2009 before they started parking ships. “For whatever reason, there is a priority on market share over sustaining rates,” said Paul Bingham, economics practice leader at Wilbur Smith Associates.
Forecasts of global demand for shipping capacity don’t hold much hope for carriers that saw global container freight rates fall for the fourth straight month in September, adding up to a 35 percent decline over the last 12 months, according to London-based Drewry Maritime Research.
Drewry’s Global Freight Rate Index, which excludes intra-Asia trade lanes, fell 12 percent amid weakness on the east-west trade, particularly Asia-Europe, and the cascading of tonnage onto faster-growing markets in developing countries.
Drewry expects container freight rates to remain volatile for some time. “A less predictable geopolitical and economic environment will make it increasingly difficult for carriers to accurately match new build capacity to demand, so leading to more turbulence in the shipping cycle,”
Drewry’s weekly benchmark rate between Shanghai and the western Mediterranean tumbled more than 20 percent in the five weeks to Nov. 2. Drewry’s Hong Kong-Los Angeles benchmark rate increased marginally over the same period, thanks to a 4.3 percent recovery in the final week to $1,542 per 40-foot equivalent unit.
A vivid illustration of the effect of increased capacity and sliding freight rates showed in the slump in OOCL’s average revenue per container for the third quarter, which fell 12 percent year-over-year. The carriers’ loadable container fleet capacity increased 6.6 percent year-over-year in the quarter, sending its overall load factor down 5.1 percent.
Some of the retrenchment has come in the niche services that some carriers launched when cargo volume was increasing steadily and freight rates were above $2,000 per FEU. The Containership Company filed for bankruptcy earlier this year. Since then, Matson Navigation, CSAV and Horizon Lines announced they were discontinuing trans-Pacific services. Grand China Shipping is suspending its trans-Pacific service this month to concentrate on its core intra-Asia and domestic services.
But these weren’t enough to dent the glut of capacity that has led carriers to slash freight rates in an effort to maintain market share.
Larger carriers already are considering measures to lift rates. Executives at Maersk Line, CMA CGM and Hanjin Shipping told The Journal of Commerce’s TPM Asia Conference in Shenzhen last month they are looking at ways of matching operations more closely to shipping volume.
Deployment of huge new vessels, Hanjin’s Christian Sur suggested, may not be a sure thing. “We will have to look at the market and ask ourselves, are we going to deploy these vessels? That decision is not without cost — we would have to pay the shipyards to keep these ships,” said Sur, a vice president for key accounts at the Korean carrier. “But this may be the lesser of two evils.”
Several carrier executives said they are considering laying up vessels in a search for equilibrium. “If we have to do it, we will do it, yes,” said Rodolphe Saade, executive officer of CMA CGM. He said capacity already is withdrawing from the toughest markets. “Is it taking place enough? No,” he said. “More capacity needs to come out.”
And many carriers with ships on charter are likely to return those ships to their owners at the end of their lease contracts next year. That means the German KG shipowners — the financial partnerships once seen as certain, near-utility investments mechanisms — will bear the brunt of the current overcapacity. “If the charters haven’t already expired, they will be expiring in the next three to four months,” said Neil Dekker, editor of Drewry Shipping Consultants’ quarterly Container Forecaster.
“We’ve had a couple of announcements by carriers of winter suspensions recently, but we don’t know whether they are putting them into normal winter maintenance or idling them more permanently. It depends on how bad things get by next March or April.”
And the real direction for capacity in the next two years may come not from the carrier community but from financial institutions that remain wary of risk after the global financial collapse three years ago. “Everybody is looking at the order books,” OOCL’s Yao said. “But whether those orders get financing is another question.”