Eastbound trans-Pacific container shipping volume is likely to increase in the low single digits this year, and that will present big challenges in the largest U.S. trade lane if carriers fail to manage capacity properly.
Industry analysts are projecting anywhere from a zero to a 5 percent increase in eastbound demand. “I’ll settle for 5 percent any day,” said Lars Mikael Jensen, vice president of network and products for the trans-Pacific at Maersk Line.
Even with muted growth, however, Jensen is modestly upbeat about the supply-demand situation this year. Five niche carriers discontinued services in 2011 and some larger carriers this year have begun slack-season layups of vessels. Other carriers announced “blank sailings,” or ad hoc cancellations of sailings for the coming weeks, Jensen said.
As a result, trans-Pacific capacity today is 14 percent less than it was in June 2011, when eastbound freight rates went into free-fall. Jensen said prospects in the trans-Pacific this year will depend on how quickly and how much carriers restore capacity after the slack winter months.
Industry analysts paint a bleak picture of the global container shipping industry in 2012. Alphaliner projects the growth in the important Asia-Europe trade lane this year will slow to 1.5 percent from 2.8 percent in 2011. Yet carriers will take delivery of dozens of vessels with 10,000 20-foot equivalent units of capacity or larger, with almost all going to Asia-Europe lanes.
Globally, container fleet capacity in 2012 is due to increase 8.3 percent after increasing 7.9 percent in 2011, leaving the prospect of global overcapacity.
In the trans-Pacific, however, carriers have cause for optimism. Vessel capacity and customer demand were in balance from Asia to the Pacific Northwest and on all-water services to the East Coast much of last year while overcapacity generally was confined to inbound Los Angeles-Long Beach-Oakland services. As a result, freight rates were under downward pressure during much of 2011 in Pacific Southwest lanes. The Drewry Shipping Consultants Container Rate Benchmark index for shipments booked by non-vessel-operating common carriers in the Hong Kong-Los Angeles trade lane dropped 27 percent from May 1 to Dec. 31.
The trans-Pacific eastbound rates in December were virtually “cash negative,” Jensen said, with Drewry listing the spot rate in mid-December at $1,436 per 40-foot-equivalent unit.
Freight rates since have seen a boost because of the Lunar New Year celebration that had Asian factories in January pumping up production before closing for two weeks on Jan. 23.
Ships leaving Asia in recent weeks were full, pushing the Drewry rate from Hong Kong to Los Angeles up $400 in early January to $1,832 per FEU, and it remained there through last week. Rates are likely to slide in February during the traditional winter slumber.
Vessel utilization likely will turn ugly in February and March, but Jensen isn’t overly concerned. Some lines already have canceled individual sailings for the next week or two. Other vessels will enter dry dock for maintenance. Some carriers and carrier alliances are discontinuing entire services until spring.
At the same time, carriers are watching important economic indicators such as retail sales, consumer sentiment, industrial production and GDP in the United States. But a divergence appears to be developing between Europe, with its sovereign debt crisis, and the United States. Economic conditions in the U.S. are decidedly better. Retail sales have increased for 18 straight months, consumer sentiment is improving, and the unemployment rate dropped to 8.5 percent in December, a two-year low.
Jensen said U.S. retailers appear to have managed inventories better than their European counterparts, and so will have to begin restocking. Maersk has some forward bookings that “already look interesting,” he said.
If trans-Pacific carriers are to avoid another steady slide in freight rates, they’ll have to do a better job of matching capacity to demand. “Layups and consolidation must occur or some carriers could be forced to close their doors,” said Bill Woods, founder and managing director of America’s Sales Agency.
Carriers don’t want a repeat of 2010 when capacity layups were followed by an unexpected surge in demand, resulting in supply chain disruptions, significant space and equipment shortages and an erosion of trust among shippers and carriers, said Brian Conrad, executive administrator of the Transpacific Stabilization Agreement, a discussion agreement of the major carriers in the trade.
But carriers can’t tolerate a repeat of last year’s dive in freight rates. They see a need this year for higher rates, Conra said, “regardless of the supply-demand situation.”