Industry experts expect the supply-demand trends that drove eastbound trans-Pacific business late in 2011 to extend into 2012. Retailers will manage inventory conservatively because of sluggish growth in the United States even as carriers take delivery of new ships that add gaping capacity that keeps freight rates under downward pressure.
Trade conditions will look better in the westbound Pacific, however. Helped by rising consumer markets and looser trade restrictions, Asian demand for U.S. agricultural goods, scrap paper and animal feed grains should remain strong for the foreseeable future, so the 8 percent growth in containerized exports in 2011 could be matched in 2012. Freight rates in the westbound Pacific will remain soft, however, because of the widely available capacity.
The low single-digit growth in imports in 2011 should not have been disastrous for carriers, especially considering containerized imports had increased 15 percent the year before. The problem in 2011, and for the next year or two, will be excess vessel capacity.
A war of attrition among carriers appears to be under way. The largest carriers are losing money, just as the smaller carriers are, but the big lines have deeper pockets. Small and midsize carriers are leaving the trade or being taken over by the largest carriers as weak freight rates persist.
Last year, The Containership Company went out of business. MISC announced it will discontinue its liner operations by mid-2012. Matson Navigation, CSAV, Horizon Lines and Grand China Shipping each pulled a China-U.S. string from the trade.
MISC said its decision to withdraw from container shipping altogether less than two years after retreating to intra-Asia markets was the result of a “radical change” in the economic fundamentals of the business.
“With the pursuit of size being the center of this change, leading operators are now testing the size limits of vessels in order to maximize economies of scale and realize greater cost efficiency,” the carrier said. “This push for investments in larger vessels comes at a time when operators are struggling to stay profitable with a depressed freight rate environment, which is not expected to improve any time soon due to the continued heavy delivery of new container vessels.”
The trans-Pacific lanes aren’t likely to get the largest of the new mega-ships, but the cascading of vessels from the depressed Asia-Europe lanes will bring larger vessels to the West Coast.
Container lines lost about $20 billion in their global operations during the 2008-09 recession. They collectively earned about $15 billion in 2010. According to research and consulting firm Alphaliner, carriers in 2011 lost at least $300 million just in the trans-Pacific.
It’s part of what Tim Smith, Maersk Line’s CEO for North Asia, last year called a “slow, seeping sickness” in the industry.
Amid such volatility, rumors have persisted about consolidation in the shipping industry. Banks and other investors, including national governments in some cases, are becoming less willing to absorb losses in the shipping industry. At minimum, the liner companies in 2012 will experience renewed interest in vessel-sharing arrangements designed to cut operating costs and spread risk. The announcement that Mediterranean Shipping and CMA CGM will cooperate on some major routes may presage more such alignments.
Carriers are convinced their future profitability will come with the introduction of ever-larger ships into the major trade lanes. These modern vessels are fuel-efficient and have significantly lower per-unit costs than older generation vessels. According to Alphaliner, almost 70 percent of the vessel orders today are for ships of 7,500- to 18,000-TEU capacity.
Because the growth in container volume will take several years to catch up with new capacity coming on line, those carriers that can absorb the losses over the next couple of years will survive and eventually prosper, but other lines will leave the business or be taken over by larger carriers.
Under this scenario, freight rates in the eastbound Pacific declined steadily in 2011 and are expected to remain soft in 2012.
The Container Rate Benchmark compiled by Drewry Shipping Consultants showed the spot rate from Hong Kong to Los Angeles declined from more than $2,100 per-40-foot container in early 2011 to less than $1,500 in mid-December.
The SCFI Shanghai Containerized Freight Index for Asia-U.S. West Coast shipments, which began 2011 at $2,020, fell 29 percent through the end of November to $1,440. The Asia-U.S. East Coast measure was only marginally better, falling 21 percent during the year to $2,560.
Equally concerning for carriers is that spot rates last year bled into the annual service contract rates, according to the Transpacific Stabilization Agreement.
The TSA, a discussion group of 15 carriers in the eastbound Pacific, announced in mid-November that its member lines were committed to propping up rates by at least $400 per FEU this month. Capacity is expected to be tight as Asia factories close out their orders before shutting down for a couple weeks for the Chinese New Year celebrations. Several carriers set rate increases for late December, hoping to set the tone for higher pricing right away at the start of the year.
Because carriers are unwilling to remove large amounts of capacity from the trade, their strategy is to implement ad hoc, short-term rate increases when volumes spike in the fall and early winter and watch as the rates erode when cargo volumes weaken during the following months.