The trans-Atlantic trade, long the most stable of the east-west shipping markets in terms of freight rates and vessel capacity, could come unhinged this year as carriers bring in more ships from other trades to make room for the large post-Panamax vessels entering service.
Freight rates, which have held up stronger than in other trades, are likely to soften, especially on the weaker U.S.-to-Europe leg, where the eurozone crisis and resulting austerity is eroding demand for U.S. goods. U.S. imports from Europe, however, are going strong and could sustain rates in the westbound trade amid resurgent demand for beer, wine and auto parts.
“We’re seeing a lot of inquiries from carriers wanting additional volume on the outbound leg,” said the logistics director of a U.S. forest products exporter that ships to Europe and Asia from East Coast ports. The inquiries and lower rate quotes are coming from carriers his company is not currently using.
The logistics director, who requested anonymity, said he is refraining from taking advantage of the lower quotes, because he hasn’t received rate quotes for the upcoming contract year from his existing carriers.
Click Image to Enlarge
U.S. importers also are receiving lower quotes from carriers bidding for their business in the coming contract season, but some worry carriers are slashing rates so low that it will destroy their service levels or even force some out of business.
“The lowest price available is not healthy, and we have no need to race to the bottom,” said Geoffrey Giovanetti, managing director of the Wine and Spirits Shippers Association, which negotiates freight contracts on behalf of its members. “Ultimately, if we don’t lose the carriers themselves, we’re going to lose the full extent of their service, because they are going to cut corners here and there.”
A U.S. importer with a national network of retail stores said he expects to negotiate trans-Atlantic contracts for the upcoming season at rates close to last year’s contract rates. “We are seeing ranges of plus- or minus-$100 per FEU on what we have right now,” said the company’s logistics director, who spoke on condition of anonymity.
The retailer’s biggest concern in concluding the new contracts is to ensure the carriers will provide contingency plans to shift imports to the West Coast if there is any disruption in East Coast port operations by the International Longshoremen’s Association, whose master contract expires on Sept. 30. “I have to walk away with a plan, and the plan has to be executable. For me, that’s the most challenging part of our negotiations this year,” he said.
Related: Building Confidence in Europe.
Several carriers have posted general rate increases on the trans-Atlantic, effective April 1. Maersk Line announced a rate hike of $300 per 20-foot equivalent unit in the trade to and from North America and northern Europe and the Mediterranean. Maersk plans to raise rates again on July 1 and Oct. 1 by unspecified amounts. OOCL announced rate increases of $300 per TEU and $400 per 40-foot container on April 1.
Giovanetti said the general rate increases are probably designed to let non-vessel-operating common carriers know what to expect on their short-term contracts for space. He expects to conclude one-year contracts at rates lower than the GRIs carriers are putting into effect.
By contrast, UPS, which acts as a non-vessel-operating common carrier and as a freight forwarder, expects to see rate increases on the trans-Atlantic as growth of vessel capacity flattens in the second quarter after double-digit increases in the fourth quarter of 2011 and the first quarter of 2012.
“Certainly, carriers are positioning increases in the trans-Atlantic, as they are in the other trades,” said Eric Souza, product marketing director at UPS Supply Chain Solutions. “With greater stability from a capacity standpoint, there’s a greater likelihood that those increases will be sustained than in the other lanes. They have been more disciplined from a pricing standpoint.”
But vessel capacity remains an open question. “We expect decelerating capacity, but this is a wild card, because carriers have a lot of vessel capacity scheduled for delivery later this year, more so than last year,” Souza said. “As those larger vessels get deployed in Asia-Europe and Asia-Middle East, how will those smaller vessels cascade into the rest of marketplace? It’s a wild card that only the carriers can answer.”
Maersk doesn’t see cascading as a major concern this year. “Yes, we have already seen this year that some of our competitors have upgraded their services with 4,000-plus-TEU vessels. It should, however, be noted that port limitations on the U.S. East Coast are a limiting factor,” said Soren Castbak, the carrier’s senior director of trans-Atlantic trade. “At this stage, we don’t see a risk of further capacity injections. Part of this capacity is to be used for other markets than North America such as the fast-growing Latin America-Europe trade through transshipment ports like Manzanillo on trans-Atlantic networks.”
Maersk estimates trans-Atlantic trade volume will grow 5 to 10 percent this year, with westbound trade growing slightly more than eastbound. Castbak said volumes between the western Mediterranean and North America will grow slightly less, but the containerization of some bulk cargoes could fuel more rapid growth there. “We also see a tendency of bulk cargo being containerized in, for instance, the automobile and agriculture industries, which continue to show good growth over the natural container-based demand growth.”
Drewry Shipping Consultants estimates the net effect of carrier service changes on the trade between northern Europe and North America boosted vessel capacity approximately 9 percent in the first quarter of 2012 from the previous quarter. Those service changes include:
- The upgrading of vessel sizes in March by the Grand Alliance together with Zim Integrated Shipping Services and Hamburg Sud in their Atlantic Express service from 4,600 TEUs to 5,500 TEUs.
- The upgrading of vessels by the CKYH alliance and Evergreen Line in March in their Trans Atlantic Express operation from 2,800 TEUs to 4,500 TEUs.
- The launch in March of the New World Alliance’s Americas Europe Express with 4,250-TEU ships.
In addition to these increases, Maersk Line and CMA CGM are boosting capacity in their AXS service, though this is a loop between the western Mediterranean and the U.S. East Coast, not strictly a trans-Atlantic service.
These increases are likely to put downward pressure on rates. “I would expect rates to fall off when we get past spring into the summer months, when volume starts to fall back,” said Martin Dixon, research manager for Drewry’s Container Freight Rate Insight. “And with the increases in capacity coming into the trade, primarily through cascading, that will inevitably have a weakening impact on rates.”
Spot rates already have fallen below their peaks of last year. The Drewry benchmark rate for shipping a 40-foot container from Felixstowe to New York in February was $2,410 in February, compared with its peak rate of $2,940 (including all surcharges) last July. On the eastbound leg, the Drewry benchmark for February from New York to Felixstowe was $1,640 per FEU, compared with the annual peak of $1,940 per FEU last May.
Drewry estimates vessel utilization rates in the trans-Atlantic will be running at 86 percent in the westbound trade and 81 percent in the eastbound leg at the beginning of the second quarter. “This is some deterioration from 2011, when westbound load factors were well over 90 percent for much of last year and are a result of cascading capacity coming onto the trade,” Dixon said. “The implication is that freight rates will weaken further over the coming months.”
In addition to capacity, the other wildcard is the outlook for demand in the U.S. and Europe. “Imports from northern Europe continue to outperform even optimistic expectations,” said Mario Moreno, chief economist of The Journal of Commerce and sister company PIERS. He said the resurgence of the auto parts trade brought about by the release of pent-up demand in the U.S. underpinned a large share of the increase in 2011. As a result, Moreno is ratcheting up expectations for this trade over the coming two years.
“Auto parts will continue to lead the region, but I expect a fourth quarter recovery in beer and ale to extend through 2012 and anticipate a sharp upsurge in the wine trade, which appeared to run out of momentum in the second half of 2011,” he said.
But the outlook for U.S. exports to northern Europe is bleak, Moreno said. The Belgian and Dutch economies already are in recession, and GDP growth in Britain, France, and even Germany was essentially flat in the fourth quarter of 2011. “With the exception of Germany, high unemployment, elevated debt levels, increased austerity and uncertainty regarding the future are all weighing on business investment and retail sales,” he said.
The result has been a continued weakening of the euro relative to the dollar, further hindering demand for U.S. goods. Moreno forecasts a 4.5 percent contraction in containerized trade growth for 2012, compared with the previous forecast contraction of 0.6 percent. “This should lead to a slightly stronger rebound in 2013,” he said, “with exports now expected to expand by 6 percent, compared with the previous forecast of 4.7 percent.”