Dave Akers is trying to sort out what’s real and what’s not in all of last year’s ocean carrier announcements of new peak season surcharges on the trans-Pacific starting Jan. 1.
“Carriers have been vacillating. Some are implementing it; some not,” said Akers, managing director of the Toy Shippers Association.
He said carriers were “all over the board” on implementing peak-season surcharges up to the Feb. 3 Chinese New Year because of the hefty new ship capacity scheduled for delivery this year. “It will be difficult for them to get increases over and above what they have already,” he said.
Akers’ view is shared by many container shipping analysts. Despite a spate of announced freight rate increases, some believe pricing will plunge this year as carriers pursue market share despite widespread insistence among carriers that they will mitigate new capacity in the market. No one argues carriers will be able to nail down the rate increases they got in the first half of last year, but carriers may try to make up the shortfall through surcharges.
Container lines were able to absorb the 14 percent increase in vessel capacity delivered last year because they maintained their efforts at slow-steaming as global shipping demand recovered. But vessel operators this year will have to maintain rigid discipline on pricing because growth in major east-west trade is slowing and global container fleet capacity is scheduled to increase another 10 percent through new vessel deliveries.
Vessel deliveries are skewed toward ships with capacity of more than 8,000 20-foot-equivalent units of containers, super-post-Panamax ships that can only be easily deployed in Asia-to-Europe trade, where ports are equipped to handle them. Carriers have been unable to nail down uniform peak-season surcharges this year on Asia-Europe lanes, where an abundance of capacity is colliding with softening demand. As a result, most carriers have decided against implementing peak surcharges and are said to be offering discounts from posted rates.
“All the indicators (suggest) carriers are now gearing up for a fight for market share in 2011, which will inevitably lead to a decline in freight rates,” said Neil Dekker, editor of the Drewry Container Forecaster. “The desire to maintain market share seems to be the primary driver in the east-west trades at the moment since carriers have resolutely refused to take out capacity from the market place despite the fact that head-haul utilization factors were in the low 80s in mid-December.”
In its latest Container Forecaster, Drewry forecasts average east-west rates (excluding fuel) will fall 7 percent this year and carrier profitability will slip back to around $8 billion, although this could be considerably lower if pricing and capacity discipline weaken further.
That discipline is at the heart of forecasts for pricing. “I don’t think there’s any chance that rates are going to come down,” said Paul Bingham, who heads the transportation economic analysis team for Wilbur Smith Associates, a transportation and infrastructure consulting firm.
“I think the question is how much are they going to go up, and it’s going to be a much smaller rate increase than we had last year,” Bingham said.
He said carriers are approaching this spring’s annual trans-Pacific contract negotiations wary that they can manage deployed capacity as effectively as they did last year. With greater balance between supply and demand this year on the trans-Pacific, there should be “lower rate increases than we saw before,” he said.
But there is a wild card on the Pacific.
Two smaller carriers, the Containership Company and Horizon Lines started new port-to-port services between China and the U.S. West Coast with smaller vessels that are not slow-steaming. Still, a growing global container fleet does not mean available space will outstrip demand, said Walter Kemmsies, chief economist of port design and engineering firm Moffatt & Nichol. He questions whether carriers will be able to deploy all of the new ships, especially those that fall in the super-post-Panamax range, and especially in the trans-Pacific, where West Coast ports have limited capacity to handle the vessels.
“If the growth of supply is accompanied by bottlenecks and congestion, the increase in deployed capacity would be less than the capacity of the new ships being delivered,” Kemmsies said. “If that happens, you end up with rates not declining at all.”
Kemmsies said several other factors may prop up rates. Carriers will continue to slow-steam ships in the trans-Pacific and in Asia-Europe lanes, he said, and several carriers still are weighed down by poor balance sheets, dampening temptation to slash rates. And the rapid growth of intra-Asia trade and north-south demand take up more capacity than those lanes have in the past. “All of this argues for rate increases that will be moderately above present levels,” he said.
At least one major carrier is warning of overcapacity.
NYK Line President Yasumi Kudo said container ship capacity will outstrip demand growth for vessel space this year and next as more container ships are delivered. In his annual New Year’s message, Kudo said the tight capacity that helped carrier profits rebound last year “will not likely recur again for the foreseeable future.”
NYK’s research group forecasts 7 to 8 percent rate in global cargo movement in 2011 and 2012 and a 10 percent annual increase in container capacity over that time. “This leaves a widening gap between demand and supply, for which we have to be prepared for some years to come,” Kudo said.
Europe’s DVB Bank said in a report this month that shipowners and operators are betting future profitability on super-sized container ships and must delay deliveries to avoid overcapacity and plunging rates.
Super-post-Panamax container ships “are becoming the backbone of the operating fleet of the top tier global liners,” the report said. If owners and operators abandon the “pro-active supply management” that restricted capacity last year, the wave of large ships scheduled for delivery in 2011 and 2012 will cause Far East-Europe rates to crash. “This will, in turn, weigh on the entire container shipping market,” the report said.
Super-post-Panamax ships account for 62 percent of nominal Asia-Europe capacity and 25 percent of capacity between Asia and the U.S. West Coast. Since the first super-post-Panamax ships entered service in 2003, average vessel size on Asia-Europe routes has risen to 7,594 TEUs from 4,816 TEUs. Because of their size, the vessels can be deployed on only a limited number of high-volume routes, led by Asia-Europe, where 8,000-TEU ships already have displaced smaller vessels.
Maersk Line, the world’s largest container line, doesn’t share DVB Bank’s alarm. “Even though there is uncertainty regarding the level of growth in the market, the difference between supply and demand does not look worrying,” said Jorgen Harlin, head of Maersk’s route network. Maersk expects the global container market to grow about 8 percent in 2011.
Contact Peter T. Leach at email@example.com.