The ocean container industry is holding its collective breath as carriers attempt to pull off the seemingly impossible feat of raising freight rates in a sputtering global economy that’s slowing cargo demand just as a steady supply of massive new ships joins major shipping lanes.
Failure to beat these challenging odds almost certainly would retrigger the bloody rate wars in the pivotal Asia-Europe trade that plunged the industry into a collective $6 billion loss in 2011 from a $20 billion profit a year earlier.
Carriers already have reined in capacity by slowing the sailing speed of their ships and idling hard-to-fill vessels. Now they’re starting to scrap service loops and cancel voyages on an ad hoc basis. The big question — indeed, the elephant in the closet — is whether carriers are sufficiently scared of another fiscal bloodbath to mount a disciplined assault on the renewed growth in surplus capacity.
Carriers have removed about 9 percent of the world’s cellular container capacity through slow-steaming and, to a lesser extent, laying up vessels that has helped buoy monthly rate hikes and surcharges since March. And that’s flowing through to carriers’ bottom lines.
Maersk Line, the world’s largest container carrier, upgraded its earnings guidance for 2012 to a “modest positive” result in August from “negative to neutral” in May and a loss in February. The optimistic turn came after the Danish line surged to a $227 million second quarter profit from a record $599 million loss in the year’s first three months.
Third-ranked CMA CGM, which stormed to a $178 million net profit in the second quarter from a $248 million loss in the previous three months, is talking about a “highly positive” third quarter that would confirm its forecast for a full-year profit.
But making the higher tariffs stick is getting tougher as faltering cargo demand, particularly slumping imports into debt-ridden, recession-mired Europe, depresses spot rates and boosts shippers’ bargaining positions going into the fourth quarter.
Not even spot rates that have dived after a peak season failed to materialize in the Asia-Europe trades have gotten carriers to blink. Niels Smedegaard, CEO of Maersk Line parent A.P. Moller-Maersk, said the carrier would increase rates through the second half of the year even if volumes are “unexciting” and the spot market peaks.
The industry has cranked up its capacity management strategy in recent weeks, but it takes just one big carrier to break ranks for the strategy to unravel.
Carriers can take solace from the fact that apart from the Asia-Europe trade, the outlook doesn’t look too gloomy. Maersk predicts 3 percent growth on the Far East-North America route compared with a 3 percent decline in westbound shipments from the Far East to Europe. Trans-Pacific spot rates have jumped 4.9 percent since the end of July, as a modestly stronger U.S. economy sucks in more imports, while Asia-Europe rates have tumbled 23 percent, according to London shipbroker Clarkson.
But the Asia-Europe trade remains key to most carriers’ bottom lines because it’s where they make the biggest profits and losses. It’s also the only viable route for the growing armada of container ships capable of carrying 12,000 to 18,000 20-foot-equivalent units coming on stream that were ordered when the explosion in Chinese exports delivered double-digit annual traffic growth on the westbound routes out of Asia.
The Asia-Europe trade is taking a major hit from the deepening eurozone crisis, which has slashed imports, especially from China. Europe’s containerized imports slumped a record 13.2 percent in July from a year earlier, nearly double the 7 percent year-over-year decline in June, according to the latest figures from London-based Container Trade Statistics.
The euro’s woes are hurting other trades, too; European imports from North America sank 10.2 percent in the second quarter, outweighing a modest 3.2 percent rise in cheaper euro-priced exports on the westbound leg.
The unexpectedly steep and accelerating slump in Asia-Europe traffic prompted Clarkson to downgrade its 2012 forecast for container trade growth to 5.5 percent in September from 5.9 percent in August and around 7 percent at the beginning of the year.
That’s bad news for 18 of the world’s top 20 carriers that boosted their combined capacity by 844,000 TEUs in the first six months of this year, more than half accounted for by Maersk and Mediterranean Shipping Co., the second-largest fleet operator, according to industry analyst Alphaliner.
But the industry is starting to take out capacity, with some carriers beginning their winter schedules early. The CKYH alliance of Cosco, “K” Line, Yang Ming and Hanjin took the initiative by dropping some Asia-North Europe sailings. The G6 Alliance has suspended an Asia-Europe loop that cut overall capacity by 15 percent in a telling turnaround from the early spring when its member lines — Hapag-Lloyd, NYK, OOCL, APL, Hyundai Merchant Marine and MOL — fast-forwarded the launch of a new service in response to strong demand. The Grand Alliance and Zim Integrated Shipping Services plan to merge two of their joint trans-Pacific services to the U.S. East Coast.
And Maersk, the Asia-Europe market leader with a near 18 percent share of traffic, said it would reduce capacity out of China in October, a prelude to what it called significant cuts later in the year.
But that will be hardly enough, according to industry analysts who say only a massive reduction of capacity, rather than a slimmed down winter program and service suspensions during China’s Golden Week holidays in October, will sufficiently rebalance supply and demand to support the latest round of ambitious rates increases announced for September and prevent a relapse into rate-cutting later in the fourth quarter.
Carriers were still adding capacity in the Asia-Europe trade into August even as cargo flows weakened and ship utilization fell to a 2012 low of 79 percent, according to Alphaliner. Carriers that invested heavily in mega-ships face the daunting task of deploying their vessels without bloating capacity on mainline east-west routes.
MSC, which has added 53 ships of more than 10,000 TEUs each in the past four years, “has taken some extraordinary steps to maintain the delicate supply-demand balance to avoid adding excess capacity in the Asia-Europe trade,” according to Alphaliner. Sharply reducing sailing speeds to stretch voyage times, the Geneva-based carrier currently deploys 47 ships of 12,500 to 14,000 TEUs on its four Asia-Europe strings, compared with 38 vessels of 8,000 to 9,000 TEUs in 2008.
MSC also diverted five of its 11,600- to 13,000-TEU ships to the Far East-U.S. West Coast market, by far the largest vessels on the route. Its latest 13,000-TEU ship was chartered out to a rival carrier.
Slow-steaming has become an integral part of capacity management while also cutting bunker costs at a time of soaring crude oil prices. The total capacity absorbed by extra-slowing-steaming has surged 30 percent since the beginning of the year and now totals 930,000 TEUs, or 5.7 percent of the global cellular fleet, Alphaliner calculates.
Carriers have stretched the rotation of 35 loops since January, taking out 230,000 TEUs of capacity. Ships are sailing at less than 14 knots on some Far East-North Europe services, increasing the average rotation to 10.5 weeks from 8.2 weeks in 2007.
Slow-steaming has spread from the Asia-Europe and trans-Pacific trades to several high-volume secondary routes, including those linking the Far East, South America, the Middle East and the Indian subcontinent. And carriers still have room to squeeze more out of the strategy. Macquarie Equities Research believes another 4 to 5 percent cut in average speeds in 2013 could be enough to stabilize the supply-demand balance and help support freight rates.
Lay-ups have surged to almost 550,000 TEUs, edging toward 3 percent of total global container capacity. But it’s not an option — yet — for the mega-ships on the east-west routes. Most of the laid-up vessels are less than 5,000 TEUs, and a majority is owned by charterers, not ocean carriers.
All bets are off, however, if demand keeps falling in the major trades.
But if carriers successfully recalibrate capacity in line with subdued cargo flows for the rest of the year and into the first quarter of 2013, they can look forward to better times beginning next spring.
The International Monetary Fund forecasts global trade will grow 5.1 percent in 2013, spurred by a recovering world economy. It’s a figure anxious carrier executives will hang onto as they hunker down for what’s likely to be a rocky fourth quarter.
Contact Bruce Barnard at firstname.lastname@example.org.