Like the Energizer Bunny, the trans-Atlantic trade just keeps going and going. In contrast to other major east-west trade lanes, where vessel overcapacity has bludgeoned freight rates, carriers in the trans-Atlantic are keeping capacity in line with relatively solid strong demand growth.
Although the outlook for 2012 is for more of same as far as capacity is concerned, the enormous financial problems roiling through Europe suggest volume may be stagnant or even turn negative.
Even though carriers dodged the overcapacity that hit other trades, trans-Atlantic freight rates in 2011 fell below the levels of 2010, when capacity was even tighter than last year. “In 2011, carriers gave back pretty much all of the rate increases they got in 2010,” said Geoffrey Giovannetti, managing director of the Wine and Spirits Shippers Association. “They haven’t made a lot of headway on trying to improve revenues, yet their costs are continuing to go up, so that’s not a good recipe for stability.”
With capacity under control, vessel utilization remained high through most of 2011, but this did not prevent spot rates from falling during the second half of last year. “Our ships are sailing close to full on the eastbound leg and in the low 90s (percent) on the westbound leg,” said Soren Castbak, senior director of trans-Atlantic trade for Maersk Line.
Other carriers also experienced strong cargo loads. “We maintained westbound utilization levels in excess of 93 percent throughout 2011 while eastbound utilization levels have been hovering around
90 percent,” said Chris Halligan, director of trans-Atlantic trade for APL.
Demand was strong last year, stronger than expected. “A year ago, I thought volumes would grow by 3 percent, but they ended up being much stronger at 7 percent,” Castbak said.
The growth came despite weakness in some of the sectors that usually support the trade, including beverages and furniture. “We had a lot of car parts and tires, moving in both directions,” he said. Despite the strong growth, Castbak is cautious about the outlook for this year, forecasting growth in the range of 2 to 3 percent, with the strongest market growth occurring in eastern Europe, where nations will benefit even more from the integration into the European Union.
“The old traditional economies in western Europe are stagnant, but the eastern European economies continue to grow,” Castbak said.
APL is looking for growth next year at about the same level as 2011, which was in the 5 to 6 percent range, but “a lot will depend on the euro,” Halligan said. “If the dollar retains its current value and range versus the euro in 2012, we would expect volume trends to remain stable and in proportion to the size of the market in 2012 versus 2011.”
With the dollar declining in value against the euro for much of last year, U.S. imports of the wine, beer, bottled water and furniture the country traditionally buys from Europe declined, but that was offset by a strong automotive trade and luxury imports.
“While auto parts and auto tires and tubes can explain some of the positive growth, it may also be the dual nature of the U.S. economic recovery that is partially responsible,” said Mario Moreno, chief economist of The Journal of Commerce and sister company PIERS. “While shipments of relatively low-cost manufactured goods in Asia are in decline, shipments of relatively expensive or luxury goods fashioned in Europe are holding up.”
Moreno forecasts the U.S. dollar will depreciate further on average against the euro and other key regional currencies, but its decline will slow because of concerns about European debt problems. “While I believed that the weaker dollar would have a more negative impact on the trade, that has not turned out to be the case, suggesting that the demand for European goods among upper-income families in the U.S. is holding up,” he said.
But with weak U.S. job growth, the growth in consumption at the upper-income levels won’t be enough to offset the overall decline in U.S. demand for European imports. Moreno forecasts U.S. containerized imports from northern Europe will grow 3 percent in 2012, compared with the 2011 growth of 10.4 percent. He forecasts U.S. exports to northern Europe will decline 3.3 percent in 2012, compared with 2011 growth of 6.7 percent.
Carriers are unlikely to add capacity to the mature trade lane next year, even as new, larger ships move into Asia-Europe trade and vessels shift to the trans-Pacific.
“There’s not enough volume out there to launch a lot of new strings, so I don’t expect a lot of new capacity coming in next year,” Castbak said. Maersk will probably keep capacity at current levels during the slack winter season, he said, because the Denmark-based carrier wants to shift capacity to those routes where harsh winter weather might cause delays.
The outlook for slow growth or even a decline could undermine any rate increases carriers are planning. Maersk is planning at least two rate increases this year, on April 1 and Oct. 1, and is considering a third on July 1. It did not get the full amounts of the rate increases it sought last year, but did get increases from shippers whose rate levels were lower than market rates.
“We did not want to be unreasonable with any clients, so the rate increases were mainly targeted at those folks that were not on par with the rest of the portfolio,” Casbak said. “That’s what we will see in 2012.”