Copyright 2006, Traffic World, Inc.
For the first time in three years, shipping lines are entering contract negotiations in the eastbound Pacific with the supply-demand numbers stacked against them.
UBS Investment Research last fall predicted the three-year boom in ocean shipping rates was nearing its end. The European investment bank projected vessel capacity in the largest U.S. trade lane will increase 14.5 percent in 2006, with demand growing by about 9 to 10 percent.
On the major east-west trade lanes, including Asia-to-North America and Asia-to-Europe, UBS said the supply-demand imbalance could translate to as much as a 15 percent drop in container freight rates this year. Morgan Stanley Equity Research in a February analysis of the major trade lanes projected a capacity increase this year of nearly 16 percent.
The report cited a port-to-port rate from Asia to Los Angeles of about $1,650 per 40-foot container, down from $1,800 to $2,000 last July. The report gave another representative rate in January of $2,600 per FEU from Asia to New York via an all-water service, compared with about $3,100 in July 2005.
Morgan Stanley said the aggressive rate action was not warranted by today''s market in the eastbound Pacific, which is actually quite healthy. The steep decline in freight rates despite strong load factors could indicate that emotional factors and the fear of overcapacity are taking hold.
Charlie Kantz, vice president of logistics at Bakers Footwear Group, said carriers are approaching negotiations earlier than usual this year. The carrier approach to rate increases has been subdued, as expected. "If anybody goes above a $100 increase, it''s ludicrous," Kantz said.
Paul Bingham, a principal at the economic research and consulting firm Global Insight, said shippers know there will be excess capacity in the trans-Pacific this year because of the record order book for new vessels. "Retailers are looking at the same numbers as carriers," Bingham said.
The vessel deliveries will indeed be impressive. Some 97 vessels ranging from 6,000 TEUs to 9,500 TEUs will enter the global fleet by year-end. Another 86 vessels of 4,000- to 6,000-TEU capacity also will be delivered this year.
Industry analysts say the true test will be how the rapidly growing carriers respond to the new capacity. Maersk Line, which purchased P&O Nedlloyd, and Hapag-Lloyd, which purchased CP Ships, could disrupt the market if they cut rates to retain the market share of the lines they acquired. Mediterranean Shipping Co., China Shipping Container Line, China Ocean Shipping Co. and CMA CGM, which will receive new vessels this year, also could precipitate a rate war if they attempt to fill the vessels immediately rather than waiting for the trade to grow into the new capacity.
But most of the deliveries will occur in the second half of 2006, so Morgan Stanley believes the trade is still three to six months away from experiencing significant downward pressure on rates.
Bingham added the introduction of new capacity, and therefore pressure on freight rates, would be uneven. The majority of the large post-Panamax vessels will enter service in the Asia-Europe trade. That scenario already has started to develop, and freight rates have begun a freefall in the Asia-Europe trade.
Conditions also vary within the Asia-U.S. trade. The port-to-port services from Asia to the West Coast are experiencing the biggest increase in capacity, because that is where carriers place their vessels of 6,000- to 8,000-TEUs, Bingham said. Overcapacity will be felt first on the Asia-to-West Coast port-to-port freight rates.
Rates in the so-called mini-landbridge route, where containers are shipped by sea to a West Coast port and moved by rail to the East Coast, also will come under pressure this year, but not as much as the port-to-port rates to the West Coast.
Because demand can exceed capacity on all-water services to the East Coast, carriers face little pressure to cut rates on that route. East Coast ports anticipate two or three new Panama Canal services this year, with possibly one Suez service from China and two from the Indian subcontinent.