Maersk Line’s warning that it would follow up 2011’s $602 million loss with another year in the red underscores the dire forecast by most of the major ocean carriers that have reported earnings, or, rather, lack of them, for 2011.
The carriers reported a litany of losses for the full year or the last quarter. Like Maersk Line, they blamed the red ink on sharply lower freight rates, especially in the Asia-Europe trade, and on the 35 percent year-over-year increase in bunker fuel costs.
Among the major carriers, only Hapag-Lloyd, whose revenue depends less than other lines on the Asia-Europe trade, managed to remain in the black last year, with an operating profit of $133 million. Hapag-Lloyd is also one of the few carriers that hedges its bunker fuel exposure, so it was able to blunt the impact of rising prices during the year.
Unless carriers can cut capacity enough to lift freight rates, especially in the Asia-Europe trade, it’s unlikely they’ll be able to get any traction on the rate increases that were to take effect on March 1. The carriers announced general rate increases of up to $800 per 20-foot equivalent unit as of the beginning of the month, and Maersk is implementing another GRI of $400 per TEU on April 1.
The question remains, however, whether shippers will go along with the increases in view of the amount of vessel capacity in the Asia-Europe trade and the scheduled delivery of more large ships this year. The lingering effects of the eurozone crisis and recession are sapping demand. Growth in the Far East-to-Europe trade reached an estimated 2.8 percent in 2011, but is expected to weaken to 1.5 percent this year.
“The carriers are expected to face considerable resistance against the announced rate increases,” industry analyst Alphaliner said. “Since March 2010, they have made nine attempts to raise freight rates on the Far East-North Europe trade, of which eight ended in failure.”
The chief barrier to rate increases is that vessel capacity already exceeds demand. Global container fleet capacity grew 13.6 percent last year, according to Alphaliner, and 253 container vessels with a combined capacity of 1.47 million TEUs are expected to be delivered this year, the equivalent of 10 percent of the current fleet. At the same time, global demand for seaborne containers is expected to increase 4 to 6 percent, with lower growth expected in the Asia-Europe trades and higher growth in the north-south trades, Maersk said in its annual report for 2011.
In the main Asia-Europe trades last year, where Maersk carried 39 percent of its global volume, westbound headhaul volume increased 15 percent. Eastbound, or backhaul volume, grew 17 percent year-over-year.
Because of overcapacity, Maersk’s average headhaul freight rate decreased 21 percent, while backhaul rates fell 13 percent. In Maersk’s trans-Pacific services, which accounted for 12 percent of its global volume, total volume increased 2 percent, while freight rates fell 7 percent year-over-year.
Carriers have begun to make some noises about cutting capacity. But for now, it’s still just noise; despite consolidation of services announced by several groups of carriers, there has been little reduction in capacity, especially of the huge 10,000-TEU-plus ships deployed in the Asia-Europe trade.
It’s not clear how these carrier service combinations will affect capacity in the future, but they’re unlikely to have any impact on rates in the first half of the year.
By the end of June, the new network configurations of the various carrier alliances should be fully implemented. Until then, weekly capacity in the trade is expected to rise by up to 14 percent from what was available at the beginning of the year, and by up to 2.5 percent year-over-year, Alphaliner said. Carriers may try to avoid another rate war by pulling out smaller loops and shifting some of the largest new ships of more than 10,000 TEUs to secondary trades, it said.
Regardless of how Maersk plans to implement the 9 percent reduction in Asia-Europe capacity it announced last month — and that remains unclear — any reductions won’t impact its March 1 increases.
That Maersk has just announced another $400-per-TEU GRI for April 1 suggests the supply-demand fundamentals aren’t quite there for March and that the earlier GRI attempt might not be entirely successful. Carriers undoubtedly need to improve rates, and these GRI attempts can certainly be considered as aggressive, said Neil Dekker, head of Drewry’s container research.
The rate increases won’t stick until carriers reduce capacity enough to offset shipper resistance. Drewry anticipates an increase in ship layups in the second half of the year, when carrier cash reserves start to run out. Many carriers already have signed Asia-Europe contracts with shippers at levels considerably below vessel operating cost.
“If every single carrier holds firm with their March and April GRIs, then there is every possibility they will have some success in the spot market,” Dekker said. “But if you look back through recent history, carrier GRIs have often been rather unsuccessful because they so quickly revert back to market share mode.”