Then the world’s largest ocean carrier launched its Daily Maersk service last fall, it set in motion a series of events that are radically transforming the world’s largest and most deeply troubled containerized ocean trade lane.
It’s far from the first time Maersk Line has left rivals scrambling in its wake, but in an Asia-Europe trade struggling to stay afloat after three years of economic and financial turmoil, it’s arguably the most radical of the new century.
The latest chapter in that transformation — following a series of reactionary partnerships among the industry’s biggest names — will come next week when carriers, including Maersk, seek to levy the steepest freight rate hikes in more than three years in an attempt to reverse industrywide losses that likely reached $6 billion last year.
For shippers and other supply chain interests, the outcome could go a long way toward determining if a volatile trade will regain much-needed stability, or if the rate volatility and service uncertainty of the past several years will intensify.
The headwinds carriers face in essentially trying to double rates — most have announced hikes of $700 to $800 per 20-foot equivalent container unit — are coming from two directions: the vessel overcapacity born of rapid shipbuilding before and during the recession and their inability to refrain from the rate wars that produced billions of dollars in red ink last year, even as volume grew in the mid-single-digits.
Whether the carriers can get all or part of their planned rate hikes to stick also depends on factors beyond their control. They include the direction of bunker fuel prices in increasingly volatile oil markets and the impact of Europe’s sovereign debt crisis on the continent’s imports from China — the driving force behind the push for ever-larger ships that demand near-full load factors to turn a profit.
“No carrier expects that the full amount of the proposed increases will be accepted by customers, but there was a strong belief that the tide has shifted direction and that they will achieve the first of what they hope will be a steady round of smaller increases over the course of the year,” said Janet Lewis, head of Asia shipping research for Macquarie Capital Securities.
For now, though, carriers’ recent track record doesn’t bode well for their rate-raising efforts: Carriers have successfully implemented only one of nine planned rate hikes since March 2010 — a $200-per-TEU peak-season surcharge last December that was underpinned by a shortage of capacity during the seasonal year-end surge in bookings and the pre-Lunar New Year rush to ship exports out of Asia.
The steady climb in spot rates from $490 per TEU in early December to around $700 per TEU in early February also was driven by a shortage of space exacerbated by the Chinese New Year falling in January, which briefly transformed beleaguered carriers into price-setters.
China is critical because bilateral trade in goods with the European Union, at more than $500 billion a year, is the world’s biggest trade relationship. And, although carriers constantly struggle with a yawning imbalance between the dominant westbound and junior eastbound legs, China is the fastest-growing market for European-manufactured exports, which soared 37 percent in 2010 to a record $113 billion. The EU spent some $372 billion on Chinese goods that year.
That’s why anxiety and uncertainty heightened this month when Beijing released data revealing the first monthly decline in China’s exports in more than two years, 0.5 percent year-over-year in January. More menacing for Asia-Europe shippers and carriers was the 7 percent dive in bilateral EU-China trade.
While the drop in overall exports can be explained by the weeklong shutdown of Chinese factories during the New Year holidays, the decline in EU-China trade points to a deeper malaise. “We believe the major drag and biggest risk to China’s growth in 2012 is weaker external demand caused by the ongoing eurozone debt crisis,” Bank of America Merrill Lynch analyst Ting Lu said.
Added the International Monetary Fund: “The risk to China from Europe is … both large and tangible.”
The Asia-Europe trade was faltering even before January’s decline. Fourth quarter 2011 traffic slipped 0.5 percent from a year earlier as a 5.8 percent drop in November smothered a mild rebound in December, according to European research analyst Container Trade Statistics.
That makes March 1 an extremely daunting time to hit shippers with rate increases that effectively double the price of transporting a container from China to a north European port.
Container shipping research analyst Alphaliner says carriers face an uphill struggle to make the March 1 rates increases stick, “with load factors expected to fall below 90 percent and with no shortage of space and containers in the coming weeks.” On the contrary, the research group says, “unrelenting” rate wars could spell “disaster” for carriers this year.
For an industry that requires 90 percent-plus load factors just to break even or eke out a slim profit, two chilling statistics underscore the difficulties carriers face in getting their increases to hold. First, vessels exceeding 10,000 TEUs will account for almost half of the nearly 1.5 million TEUs of capacity due for delivery in 2012, and almost all of those vessels likely will be deployed on Asia-Europe routes. Second, that capacity is scheduled for deployment in a year when traffic growth on the trade is expected to slow to just 1.5 percent from an estimated 2.8 percent in 2011.
Some carriers already are bending — if not breaking — on the planned rate hikes, according to Paul Tsui, chairman of the Hong Kong Association of Freight Forwarding and Logistics. He said some carriers already are offering reduced rates for post-March 1 sailings. “I personally do not think this (general rate increase) will hold. The overall load factor is between 65 and 70 percent at the moment,” he said.
Others see desperation among the carriers that will lead to measures aimed to prop up pricing.
Although demand has been “very slow” in the wake of the Jan. 23 Chinese New Year, Byron Lee, managing director of forwarder China Global Lines, predicted necessity would force carriers to take whatever measures were needed to push the rate increases through, “including the mass idling of tonnage.”
Some of that carrier resolve began to show after Maersk ordered 20 18,000-TEU vessels — the largest container ships in the industry’s 55-year history — and then started its “conveyor belt” service between four Asian and three European ports last October. Mediterranean Shipping and CMA CGM, the world’s second- and third-largest carriers by liner capacity, quickly joined forces in a vessel-sharing alliance spanning several routes that include the Asia-Europe trade. Two of the world’s established partnerships — the Grand and New World Alliance — followed by announcing they were combining into a new six-carrier G6 alliance likewise spanning some of the world’s largest trade lanes.
But, in an indication that the transformation of the carrier industry was moving much faster than the two alliances anticipated, the G6 moved up its start date to March 1 from April to coincide with the planned rate increases.
The reshuffled partnerships on the Asia-Europe route are “the most significant carrier realignment since 1996-97, when the last major alliance restructuring took place,” Alphaliner said. And the planned rate hikes “are the highest quantum proposed by carriers since the abolition of (liner) conferences on the European trades in 2008.”
Even if carriers manage to hold onto some of the increases, they will struggle to return to profitability this year, Lewis said. A major rebound in rates, she said, is unlikely before the summer-fall peak season.
“We continue to believe that most operators will struggle to make money in 2012, but the outlook has nevertheless improved,” Lewis said. “The newly formed alliances do offer the hope of improvement in rates over (the second half of) 2011, but to levels where many operators flirt with continued losses. “The first step is for the alliances to develop their strings with capacity that meets market needs, because if everyone is operating at just 80 percent load factors, pricing discipline won’t hold.
The catalysts for this transformation, of course, are the wrenching economic and financial crisis in Europe that is dampening demand for Asian goods, as well as Maersk’s stated intention to defend its industry-best market share while reducing costs and pushing the market toward consolidation.
That strategy has raised the ire of Maersk’s rivals, who blame the Danish carrier for driving down rates to near “zero” in the Asia-Europe trade, and clearly set the stage for a “Maersk vs. the Rest” battle.
The first indication of how Maersk’s strategy is playing out will come Feb. 27, when its Denmark-based parent, A.P. Moller-Maersk, reports 2011 financial results. Those are expected to show its flagship container line sinking deeper into the red. The carrier had a $297 million loss in the third quarter, a steep turn downward from the $1 billion profit of a year earlier.
But even as they strain to make the higher rates stick, carriers run the risk of alerting the attention of EU trustbusters in Brussels who already are investigating several European and Asian lines suspected of cartel-like activities following dawn raids on their European headquarters last May.
EVO, the activist Dutch Shippers Organization, said it assumes regulators will probe the “unnaturally high” rate increases introduced “in a very short period of time … if irregularities come to light.” Shippers fear if carriers maintain discipline and enforce the higher rates, smaller lines that haven’t increased their charges lack capacity to offer an alternative.
It’s not all gloom for the carriers. Nobody expects a repeat of the of the 2009 bear market when westbound shipments out of Asia crashed 14.5 percent, the first ever decline on a route that has boasted double-digit growth year after year. Carriers also can take solace from improving fundamentals on other routes, including the trans-Pacific, where traffic and rates are rallying. Global container volume will grow 7.7 percent this year, outpacing a 7.3 percent expansion in the global fleet, according to London shipbroker Clarkson.
But the Asia-Europe route remains key to carriers’ bottom line. They can easily take out capacity to shore up the market and avoid a potentially ruinous rate war, but it all depends on who blinks first given that new Maersk CEO Soren Skou’s has made defending market share his top priority.
There is evidence carriers are starting to cull capacity on the trade to close a supply-demand gap estimated at up to 14 percent in 2012 if all planned services proceed. Carriers also are moving large Asia-Europe size ships to smaller routes. United Arab Shipping, for example, plans to deploy its new 13,100-TEU vessels on a Far East-Middle East service operated jointly with CMA CGM and China Shipping Container Line. That would be the first time 10,000-TEU ships or larger operate beyond the mainline Asia-Europe trade.
The uncertainty over the level of freight rates on the Asia-Europe route — and the trans-Pacific, for that matter — over the next few months has fed into the freight futures market. Trading volumes on the Shanghai Shipping Exchange have fallen to their lowest levels since the SSE began trading container freight futures last June, according to Alphaliner. Average daily volumes traded Feb. 2-8 fell to just 15,000 TEUs compared with a 169,000-TEU average through January.
Forward rates to North Europe have soared in volatile trading, with April contracts trading at $1,078 per TEU from a low of $700 in January.
The market remains unconvinced, however, of carriers’ ability to totally implement their planned general rate increases. But analysts expect rates to rise sharply in the second half of the year as carriers are forced to lay up ships to stop hemorrhaging cash. Smaller carriers could be driven out of the trade. Some carriers risk running out of cash. The alliances could come under strain.
It seems certain, however, it will remain Maersk vs. the Rest on the Asia-Europe trade through 2012. The Danish carrier has deeper pockets than its rivals and can ride out a rate war while protecting its market share until the arrival of its armada of 18,000-TEU ships in 2013-2014 ratchets up the competition to another level. That means 2012 could yet turn out to be the calm before the storm.
Mike King in Malaysia contributed to this report.
Contact Bruce Barnard at email@example.com.