Shipping lines preparing to close their books on a year of hefty losses face a difficult choice: They can find ways to reduce capacity enough to lift freight rates on the money-losing east-west trade lanes or they can try to maintain the market share they have built by slashing rates.
Problem is, with huge numbers of big ships due for delivery next year, every additional slot of capacity carriers deploy is likely to lose money unless demand for cargo space picks up. Forecasts on how it will play out are mixed.
Mario Moreno, chief economist of The Journal of Commerce, sees the volume of total U.S. container imports increasing only 2.8 percent in 2012, compared with 2.2 percent this year. U.S. exports, he says, will grow at a much faster rate of 5.7 percent, only slightly below the 5.8 percent pace of 2011. Because the import leg is the headhaul on U.S. trade lanes, the growth Moreno forecasts wouldn’t be strong enough to boost carriers’ vessel utilization rates, and so wouldn’t support the rate increases carriers hope to implement.
Others are more bullish on the immediate outlook, however. Walter Kemmsies said strong U.S. retail sales over the last few months and the 16 percent surge during the Thanksgiving weekend start to the holiday season means retailers will have to start restocking their lean inventories soon.
“Inventories are dangerously tight,” he said. “In the next several months, we’re going to see better volumes than expected.”
Rahul Kapoor, a Singapore-based shipping analyst with broker RS Platou, said prospects for carriers on the trans-Pacific are much better than in the Asia-Europe market, “given supply adjustments” and the “not so bad” demand outlook from the United States. “We see a potential for inventory restocking there, albeit at a more gradual pace than in 2010,” he said. “We expect rates to recover on expected improvement in demand ahead of the (Jan. 23) Lunar New Year, but capacity adjustments would be the key to the extent of recovery.”
Carriers will lose more than $800 million in the trans-Pacific this year, according to research analyst Alphaliner, which forecast year-over-year volume growth for 2011 of only 1 percent. Some carriers already have cut capacity on the trans-Pacific and Asia-Europe lanes for the slack winter season, but that capacity largely will be deployed on other trade lanes.
Other smaller carriers pulled out of the trans-Pacific, and MISC Berhad is quitting the container business altogether next year. But this will remove only a small amount of capacity. The delivered capacity of new ships is expected to grow 8.7 percent this year and in 2012, according to Alphaliner, which forecast the deployed capacity of the global container fleet would increase 10 percent this year.
Carriers stopped ordering significant amounts of new capacity at the end of the second quarter, according to Philip Damas, director of Drewry Supply Chain Advisors in London. Even though new container ship prices have fallen steeply since 2009, carriers can’t get the financing to buy new ships now because banks are increasingly leery of extending financing to any but the bluest of the blue-chip carriers.
Carriers have begun to reduce capacity in the trans-Pacific, but not much yet in the Asia-Europe trade. By the end of November, carriers had cut capacity in the trans-Pacific by about 10 percent. “We are already hearing that containers are being rolled,” Damas said. But he does not expect rates to firm up in the first quarter, even though the Transpacific Stabilization Agreement has set a voluntary guideline for its 15 members to increase eastbound freight rates and charges by a minimum of $400 per 20-foot equivalent container unit as of Jan. 1.
“The market hasn’t reached the bottom yet,” he said. “That will happen when some of the carriers run out of cash and will be forced to withdraw capacity.”
Ron Widdows, the senior adviser to Neptune Orient Lines who retired as group president and CEO in October, thinks carriers will start to idle more ships in the trans-Pacific, but not enough to support freight rates in the first half of 2012. “I do believe there will be a substantial amount of capacity that will be parked,” he told the annual Textile and Apparel Trade & Transportation Conference in New York in November. “Will it happen before the trans-Pacific contracting period? It could, but probably not.”
Damas said carriers have cut only about 4 or 5 percent out of the Asia-Europe trade this year, not enough to make a “meaningful’ reduction in the overcapacity that caused pricing to plunge to levels that Alphaliner called “zero” rates.
The Shanghai Containerized Freight Index for Asia-Europe fell to just $500 at the end of November, down 40 percent from late August.
Now, the prospect of industry consolidation again is coming into play, through an increase in vessel-sharing agreements, the combination of routes and services and through mergers and acquisitions. The most dramatic indication of this is the combination of services announced by Mediterranean Shipping and CMA CGM on Dec. 1. The world’s second- and third-largest ocean carriers said they would join forces on key trade routes, including Asia-North Europe, Asia-Southern Africa and all South America markets. They said the partnership would allow them to deploy their best ships, while increasing the number of port calls and frequency of sailings.
But the combination probably won’t reduce capacity because the two family owned carriers are likely to return any chartered ships whose contracts are up to their owners, who will try to charter them again, even at the low market rates, according to Peter Shaerf, managing partner of AMA Capital Partners, a New York investment bank that specializes in maritime deals. He said institutional investors believe CMA CGM remains under financial pressure.
For shippers, the main impact is likely to be a considerable reduction in the schedules of the two carriers and elimination in the number of services. The partnership, which is seen as a response to the introduction of Maersk Line’s “Daily Maersk” service on the Asia-Europe trade, could touch off further combinations or even mergers among other carriers.
“Carriers will have to take steps to join forces in one way or another, otherwise Maersk just gains more market share,” Shaerf said. “The critical drive to gain market share leads to the bigger carriers undercutting rates, and the names are obvious.”
Through their partnership, MSC and CMA CGM together will control 21.7 percent of global container ship capacity, compared with Maersk’s 15.9 percent.
Shaerf said such consolidation is the obvious next step in the struggle for survival against Maersk’s dominant position. “At the lower end, it becomes a consolidation of services,” he said. “At the higher end, it becomes more of a merger.”
One sign of this was a report that NOL was in new talks to acquire the 38.4 percent stake in Hapag-Lloyd that German travel company TUI wants to sell in January. Although NOL quickly denied the report, it was a sign the industry is expecting some consolidation in the year ahead because of the weakening balance sheets of several major carriers.
Drewry Shipping Consultants maintains a service called the “Z Score” as part of its Freight Shipper Monthly Insight to analyze the financial strength of carriers, along with freight rates, demand and other industry vital signs. The latest Z Score for the top 20 container lines shows seven of them are in what Damas calls the “red zone,” meaning they are at a higher risk of bankruptcy. Eight others are in the “gray zone,” indicating their balance sheets are unhealthy. Only five are in the “green zone,” signifying stable financial health.
The number of carriers in the Red Zone suggests momentum is building for one or more carriers to engage in some kind of merger. “Financing is tough and will continue to be so,” Shaerf said.
MOL President Koichi Muto said last month the three Japanese carriers — MOL, NYK Line and “K” Line — should consider spinning off, and consolidating, their liner fleets in the face of mounting losses in the container sector. The consolidation would create the world’s fourth-largest container carrier and give the combined Japanese mega-line a 7.5 percent market share, compared with the three companies’ individual shares of 2.2 to 2.8 percent each. Muto said discussions about a merger of the carriers’ container operations have not occurred but could not be ruled out. APL subsequently entered a slot-sharing agreement with MOL on the Japanese carrier’s intra-Asia service linking Japan, Thailand and the Philippines.
Alphaliner analyst Hua Joo Tan, however, doubts there will be actual mergers. “There is limited potential for consolidation in 2012,” he said. “The Japanese carriers will need to find the political will to get together and I doubt such courage is forthcoming,” he said.
-- Contact Peter T. Leach at email@example.com. Follow him on Twitter @petertleach.
“The MSC-CMA CGM partnership is a loose alliance structure involving a limited number of trade lanes. This hardly counts as a consolidation move.”