Two industry analysts are expressing skepticism about container lines’ ability to maintain rate discipline next year in the face of an expected rise of nearly 10 percent in capacity. Liner operators are expected to find the increased capacity “too great a temptation not to play with,” Credit Suisse said in a report on the Asian shipping sector.
The report said this year produced “a rare moment of apparent rational behavior” by carriers that idled ships to offset an increase in capacity that grew at twice the rate of demand.
Credit Suisse cited scrapping, layups and slow-steaming “as examples of the newfound sobriety” by container lines, most of which returned to profitability this year. “However, when one digs deeper, there is no real evidence of commitment to this process, in our view,” the report said.
Most layups this year have come from returning surplus chartered ships to owners, but that slow-steaming “has practically played itself out,” the report said, adding that an average fleet age of about 10 percent means scrapping is likely to slow. “With a welter of new deliveries scheduled for 2013 … we are in no way convinced that 2012’s ‘get out of jail free’ card can be played again, and believe that rates will be negatively affected.”
Hua Joo Tan, executive consultant at Alphaliner, told an audience at Macquarie’s industrial, infrastructure and transportation corporate day that most container lines still focus on market share when they are operating above break-even. In the absence of strong capacity utilization, pricing discipline has been observed only when the carriers are losing money and freight rates are below the cash break-even level.
Since the financial crisis, carriers have been trapped in a cycle of idling vessels when rates fall below break-even levels, only to reactivate them as soon as rates rise above break even, Hua Joo said. This has compressed the shipping cycle to 12 to 18 months, compared with the traditional four to six years, he said.
Ken Cambie, chief financial officer of Orient Overseas (International) Ltd., responded to Hua Joo’s presentation, saying there is no single break-even point for the industry any more, as larger ships provide cost advantages over older, smaller vessels. That advantage can be up to $200 per 20-foot-equivalent unit on the Asia-Europe trade, he said.