Fears of overcapacity are beginning to weigh on shipping lines in the eastbound Pacific, and some lines are already cutting deals with cargo owners and consolidators to protect their market share in what for them is expected to be a difficult year ahead.
Rates softened during the past few weeks in the busiest individual U.S. trade lane, Hong Kong and South China to Los Angeles-Long Beach, where cargo volumes this year have been disappointing.
Carriers also are looking ahead to 2006, when fleet capacity will increase by almost 16 percent as dozens of post-Panamax vessels enter the global market. With cargo volumes likely to increase only 8 to 12 percent globally and about 10 percent in the Pacific, it appears that there will be excess capacity in the U.S. import trade from Asia.
The market will be further complicated by the growing influence of carriers such as China Shipping Container Lines, Mediterranean Shipping and CMA CGM, which have strong backing from non-vessel-operating common carriers.
Those three lines will add 66 new container ships to their fleets by the end of 2006, with 47 of the vessels ranging in capacity from 5,000 to 9,200 TEUs. That means NVOs in the coming years will have an increasing impact on rate negotiations in the eastbound Pacific, a trade traditionally dominated by beneficial cargo owners and large retailers.
Carriers insist that they are not pushing the panic button. Cargo volumes from Asia's largest exporter, China, remain strong. China's exports in the first half of 2005 increased 37.7 percent over the comparable period last year, said Joe Alagna, vice president of sales at China Shipping (North America) Agency Co. He said he expects the strong growth to continue through next year.
The Transpacific Stabilization Agreement, a discussion group representing 13 carriers in the eastbound Pacific, considers 2006 to be a bellwether year, but with uncertainties such as the impact of port congestion on vessel capacity, it is too soon to predict overcapacity in the trade. "To call 2006 in July 2005 is premature," said Albert A. Pierce, executive director of the TSA.
Carriers currently are concentrating on the 2005 peak shipping season, which is turning out to be a mixed bag in the various trade lanes. All-water services from Asia to the East Coast have been fully booked since spring, with some carriers rolling cargo in Asia to subsequent voyages because their vessels are full. A general rate increase and peak-season surcharges negotiated earlier this year are holding.
Rates to the West Coast have slipped. Carriers had negotiated general rate increases of about $150 to $200 per 40-foot container, but those rates are being rolled back. Carriers announced a peak-season surcharge to take effect on June 15. They have since postponed it and hope for a surge of traffic this fall. Intermodal rail rates increased slightly this year but have backtracked somewhat in recent weeks.
Generally, rates to the West Coast are at 2004 levels, although that is not necessarily bad for the shipping lines. Carriers negotiated a big rate increase in 2003 and a modest increase last year, and therefore experienced two consecutive years of profits. If profits this year equal those of 2004, carriers will not complain.
Maersk Sealand, the largest carrier in the eastbound Pacific, said its cargo volumes are where the line projected they would be as the peak season begins. Gordon Dorsey, a spokesman, described the trade as "stable and building," with a strong peak anticipated in September and October.
Most carriers, though, have not been able to fill their vessels to Los Angeles-Long Beach, which accounts for about 70 percent of imports on the West Coast and 40 percent of total U.S. imports from Asia. NVOs have played off this spot weakness in the market. "We've gotten some reductions from Hong Kong and Shenzhen," said Ray Camero, chief executive of Streamline Shippers Association. "There's more capacity and no congestion. The cargo's not there."
Shippers and carriers over the past year have diverted a noticeable share of their cargo to Oakland and the Pacific Northwest, as well as to East Coast ports, following five months of congestion and delays last summer and fall in Southern California. As a result, imports in Los Angeles-Long Beach through June are up only about 4 percent, whereas West Coast imports overall increased about 8 percent during the same period.
Carriers this year have announced no new services for Los Angeles-Long Beach, although they are increasing the size of the vessels on some strings. China Ocean Shipping Co., for example, is bringing 7,500-TEU ships into the trade lane this summer and fall.
Shipping lines by the end of 2006 are scheduled to take possession of 75 vessels with capacities ranging from 8,000 to more than 9,500 TEUs. Many of those mega-ships will enter the Asia-Europe trade, but some will have to be deployed in the trans-Pacific, which is the only other trade lane that can physically or commercially accommodate vessels of that size.
Recent moves by the U.S. to restrict imports from China, such as the safeguard actions involving textiles and apparel, could contribute to overcapacity problems for carriers that have placed most of their new vessels in the trade lanes from Hong Kong and China. Textile imports from China surged 60 percent in January and February, but growth has since dropped off dramatically.
Shippers, fearing a growing protectionist attitude in the U.S. toward China, are shifting some of their sourcing from China to India and Southeast Asia, said Ray McGuire, vice president of international services at Kellwood New England. This could result in even more excess capacity on the South China-Southern California corridor.
NVOs are expected to play a larger role in the eastbound Pacific. In addition to representing their traditional market of small and midsize shippers, NVOs are getting more bookings from larger shippers who are turning a portion of their cargo over to consolidators in search of lower rates.
Large retailers still have the greatest influence in the eastbound Pacific. Their rates set the benchmark, with smaller shippers and NVOs negotiating somewhat higher rates. In that respect, contract negotiations this year were similar to past years, with the large beneficial cargo owners completing their negotiations first, said Brian Conrad, assistant executive director of the TSA. "There are no indications that the NVOs were the leaders this year," Conrad said.
However, carriers such as China Shipping, Mediterranean Shipping and CMA CGM that are strong in the NVO-dominated trades such as Asia-Europe and the trans-Atlantic, are now the fastest-growing lines in the Pacific and are wielding greater influence with their NVO cargo base. Furthermore, established trans-Pacific carriers such as Maersk Sealand are actively pursuing NVO cargo.
As carriers compete for NVO cargo in the eastbound Pacific and larger consolidators leverage their growing cargo volumes, prices could come down in the NVO segment of the market.
With such developments in the works, carriers in the coming year are expected to focus more attention on costs rather than on supply-demand economics. Indeed, the TSA announced that effective Aug. 15 its members intend to assess fuel surcharges of $137 per container for intermodal rail and $40 for truck shipments to cover their increased costs for inland transportation.
The fuel surcharges are voluntary guidelines, and the TSA has no enforcement powers over its 13 members, but the move indicates that surcharges for diesel fuel, bunker fuel and security measures could play a more important role in carriers' negotiating strategies.