When the annual round of contract negotiations between trans-Atlantic shippers and ocean carriers starts up later this winter, the tone may be more intense than in the past. Freight rates in the trade ended 2012 with a whimper, as carriers collected only a small portion of the series of general rate increases they sought. As a result, they are determined to boost rates in their 2013-14 contracts, while shippers are equally determined to hold costs down. Expect carriers to test the waters with a series of new GRI announcements early this year.
Unlike the other major east-west trades, it’s not a huge glut of vessel capacity holding rates down, but lackluster demand. Trans-Atlantic carriers increased vessel capacity in 2012 to meet what they expected to be growing demand, but the European recession and sputtering U.S. growth meant supply outstripped demand. The outlook for volume growth on both legs of the trade with northern Europe isn’t much better, although trade in the Mediterranean region looks much stronger.
Because of the European recession, Mario Moreno, chief economist of The Journal of Commerce and its PIERS sister company, forecasts U.S. container trade with northern Europe in 2013 will increase by a scant 0.5 percent to 1.4 million 20-foot-equivalent units. He sees U.S. imports growing 3.9 percent, while exports will be almost flat at 0.5 percent.
Moreno expects total U.S. container trade with the Mediterranean will grow a more robust 8.7 percent for the year to 983,000 TEUs. He expects U.S. imports from the region to increase 8.4 percent and exports to rise 9.2 percent.
Total volume on both legs of the trans-Atlantic in the first nine months of 2012 increased 8 percent to 315 million TEUs compared to a year earlier, according to Dynaliners, a Dutch publication. But total revenue declined 6 percent to $1.6 billion, underscoring the rate headwinds carriers faced.
“Demand is projected to increase in 2013, albeit at lower levels than what we have seen in 2011 and 2012,” said Bill Woodhour, head of North American trade for Maersk Line. “Westbound, we expect growth in the 5 percent range, and eastbound we don’t anticipate the volumes to change from 2012 levels.”
Although Woodhour expects the outlook for U.S. trade with the western Mediterranean to mirror that with northern Europe, he’s a bit more optimistic about U.S. exports to the region, which he expects to grow moderately.
Unlike recent years, Maersk did not pre-announce the GRIs it plans to implement in 2013 and is waiting to see if the demand will support one. “Market conditions during the first few months of 2013 will determine if a GRI is implemented,” Woodhour said. “Rates are indeed too low. While we will continue to focus on costs, we’ve made it clear that improving rates is necessary for long-term stability.”
He said Maersk would aim to increase rates in 2013 to ensure “sustainable access to competitive space for the long haul.”
But shippers are unlikely to accept big increases, despite recognizing that rates are at “extremely low levels,” as one importer put it. Carriers are likely to ask for increases of $500 to $600 or more per 40-foot-equivalent unit in the annual contracts that will take effect between April 1 and June 1.
Shippers say they won’t accept increases of more than half that amount, because they say the market won’t support bigger hikes. The World Container Index for spot rates from Rotterdam to New York, which is compiled by Drewry Shipping Consultants and the Cleartrade Exchange, averaged $2,418 per FEU at the end of November. The WCI on the backhaul from New York to Rotterdam was $1,927 per FEU.
“Rates will go up,” said Geoffrey Giovanetti, managing director of the Wine and Spirits Shippers Association, which negotiates fright contracts for its members. “It’s our job to try to dampen the increases.”
At the same time, he recognized the carriers’ need for higher rates. “All carriers have said they need more revenue. We are not normally sympathetic to this, but we recognize we need ocean carrier service as much as they need our commodities,” Giovanetti said.
In the face of shippers’ continuing resistance to rate increases, carriers will continue to cut costs in the trans-Atlantic. “What we see as more likely is that lines will introduce economic speed to the Atlantic over time, which offers both environmental and economic advantages,” Woodhour said.
Maersk is starting to slow-steam its vessels on the TA4 service between northern Europe and Canada and may introduce the practice in its trans-Atlantic service with the U.S. in 2013. “Maersk Line is constantly evaluating this opportunity in this and other trades,” he said.