Ocean carriers are walking a tightrope in the Asia-Europe trades as they prepare to raise freight rates for the fourth time this year in a bid to maximize profits during the peak shipping season.
So far, so good. Carriers struggling under the weight of an estimated $5.5 billion in losses last year, have made three previous rate increases stick, bringing spot rates westbound out of Asia to almost $2,000 per 20-foot container by early May from less than $500 in December.
The rate surge, which has come despite slowing traffic, is largely due to carriers’ discipline in maintaining capacity cuts, spurning low-paying cargo and resisting the temptation to fill vacant slots with discounts on published tariffs.
But that discipline, forged in the aftermath of a cash-bleeding rate war in 2011, is coming under severe pressure as carriers introduce a small armada of giant vessels above 10,000 20-foot equivalent units just as westbound traffic faces a potentially unprecedented decline.
Carrier nerves are fraying as the spot market is turning down just as they prepare to impose peak-season surcharges of $250 to $400 per TEU in June. Spot rates on the Shanghai Containerized Freight Index fell $116 per TEU, or 6 percent, in the second week of May, the biggest weekly decline since October 2010.
Current forward spot rates show a moderate downward trend for the rest of the year, indicating the market’s lack of conviction that the peak-season surcharges will hold, container market analyst Alphaliner says.
The planned peak-season surcharges appear out of sync with the economic developments at either end of the trade as Europe risks being overwhelmed by its sovereign debt crisis and a slew of disappointing trade, investment, production and spending data shows China’s slowing economy is far from bottoming out.
Meanwhile, bunker fuel prices, which account for an increasing chunk of ship operating costs, are still rising strongly and making it even more difficult to turn a profit.
The eurozone crisis already is dampening the cash-strapped continent’s ability to pay for imports from Asia, particularly China, whose explosive export drive has delivered double-digit growth on the westbound route in recent years.
China’s exports to the 27-nation European Union, its biggest trading partner, fell 2 percent in April from a year earlier, the second consecutive monthly decline. Softening the blow a bit was a 4 percent increase in imports that bolstered traffic and rates on the smaller eastbound trade.
Europe is buying less from other Asian nations, too: Japan’s exports declined 9.4 percent in the first quarter, while South Korean shipments collapsed 17.7 percent.
Carriers can take solace, however, in rising shipments to the U.S. that offset the declines in Europe. China’s exports to the U.S. grew 12.8 percent in the first quarter, Japanese sales were up 12.5 percent, and South Korean shipments surged 24 percent.
And not all carriers are overexposed to the Asia-Europe trades. Singapore’s NOL generates just 16 percent of its container revenue on the route, compared with 40 percent in the more buoyant trans-Pacific trades. France’s CMA CGM said the Europe-Far East run accounts for just 10 percent of its liner trades.
The decline in Asia-Europe rates also isn’t typical across carriers’ global networks. Hapag-Lloyd said average Asia-Europe freight rates in the first quarter slumped 21.5 percent year-over-year to $1,484 per TEU, but rose to $1,753 from $1,707 in the trans-Pacific and slipped just $5 to $1,751 in the North Atlantic.
But the Asia-Europe trade, particularly during the peak season, remains key to carrier hopes of booking full-year profits after heavy losses in the seasonally slow first quarter and billions of dollars in losses in two of the past three years.
It will be tough maintaining capacity and rate discipline in the coming months as carriers take delivery of 29 new ships of more than 10,000 TEUs each by year-end on top of the 26 similar-sized vessels that joined their fleets in the first four months of 2012. Most of these mega-ships of up to 18,000 TEUs were ordered on the assumption that China would continue to deliver double-digit growth and the smaller players without super-sized vessels would be driven out of the trade. That hasn’t happened.
What is happening is the first signs of discipline breaking down. Israel’s Zim Integrated Shipping Services hailed the relaunch of a joint service with Evergreen and China Shipping Container Line suspended in November 2011 as “an indication of positive developments in the market,” while the G6 Alliance announced a day later it wasn’t adding a planned extra loop because member carriers — APL, Hapag-Lloyd, Hyundai Merchant Marine, MOL, NYK Line and OOCL — “have not seen any improvements in the current market environment to justify implementation of additional services.”
The supply-demand situation is on a knife edge in the run-up to the summer peak season with recent new services adding 18,000 TEUs of weekly capacity and negating the impact of the approximately 16,500 TEUs withdrawn earlier by Maersk Line and CMA CGM that played a critical role in making rate hikes stick.
Much depends on how Maersk will react to the extra capacity sure to start eating into its industry-best market share. The Danish carrier attributes the surge in its market share to a record 19.4 percent to the launch of its Daily Maersk service in October. Rivals put it down to merciless rate-cutting aimed at driving out smaller, more vulnerable players and swooping up their business.
In March, Maersk CEO Soren Skou warned competitors that while it would push for higher rates, “at the end of the day, we want to hold onto our market share at all cost. We will do what it takes.”
There is no indication he has softened his position over the past two months.
Forecasters already had downgraded the outlook for Asia-Europe traffic growth before the dynamics began to change in recent weeks. London broker Clarksons expects growth on the westbound leg to slow to 1.7 percent from 3.3 percent in 2011 while BoxTrade Intelligence says shipments likely will shrink 1 percent.
By contrast, global container traffic will expand 7.1 percent in 2012, down slightly from 7.6 percent in 2011, according to Clarksons. That’s scant solace for companies that have invested heavily in giant vessels earmarked for the Asia-Europe trade that can’t easily switch to other routes.
Hapag-Lloyd, one of the rare carriers to turn a profit in 2011, said short-term prospects “remain shrouded in uncertainty” because of the recession in the eurozone, slowing economic growth in China and a bloating U.S. budget deficit. Further rate hikes and a strong performance in the peak season will determine whether it makes a full-year profit, a common template for most carriers seeking to return to the black.
Failure to push through peak-season surcharges “could have significant negative ramifications on the carriers’ attempts to return to profits this year,” Alphaliner said.
It’s not all gloom and doom. Clarksons forecasts 5.1 percent growth in westbound shipments in 2013. But there’s significant downside, notably prolonged fallout from Europe’s debt crisis.
Contact Bruce Barnard at email@example.com.