Carriers in the eastbound Pacific look to 2013 as a year in which they will return to profitability. They also intend to avoid the extreme rate volatility that defined their relationship with customers last year.
This optimistic scenario could play out if carriers’ performance in January sets the tone for the rest of the year, said Brian Conrad, executive administrator of the carrier discussion group known as the Transpacific Stabilization Agreement.
“The signs are more positive than last year,” Conrad told the OrangeCounty chapter of Women in International Trade Thursday in Newport Beach, Calif.
The liner industry lost money in 2011. Most carriers last year had a strong third quarter, but after a week fourth quarter they ended 2012 with a flat to slightly negative bottom line. January, however, was a good month, especially in the eastbound Pacific.
Buoyed by strong cargo loads in the month leading up to Chinese New Year, carriers operated with vessel utilization rates in the mid-90s. Thanks to a rate increase in January that pretty much stuck, freight rates approached the level that could be considered compensatory, Conrad said.
Today’s environment is quite different from the conditions that existed in early 2012. Carriers were coming off of a disastrous fourth quarter of 2011, when freight rates were “significantly depressed — well below compensatory,” he said.
Carriers last spring signed annual service contracts with beneficial cargo owners that locked in those depressed rates for the coming year. In order to keep from going under, carriers implemented a half-dozen general rate increases or surcharges that were paid primarily by smaller shippers and cargo consolidators. This caused friction between carriers and many of their customers.
The strategy this year is to sign BCOs to annual service contracts at compensatory rate levels and thereby avoid the volatility experienced last year, Conrad said. Carriers might be able to return to the traditional pattern of implementing a general rate increase in contracts signed in May, and a peak-season surcharge in the busy summer-fall period.
However, in order to do this, carriers will have to demonstrate strong resolve during the normal ebbs and flows of the trade cycle, Conrad said. The first test is occurring now, as cargo volumes fall off dramatically while factories in Asia are shut down for the Chinese New Year celebration.
Vessel utilization rates in the coming weeks will most likely drop into the 80s before climbing again in March, Conrad said. During the next few weeks carriers will engage in “void sailings,” in which they cancel some voyages due to a lack of cargo.
Carriers will also grapple with a projected increase in global vessel capacity of 8.9 percent this year. By contrast, demand in the eastbound Pacific is expected to increase 3 to 5 percent over 2012. It is not known what the hike in capacity will be in the Pacific, although capacity is likely to increase to some extent, Conrad said.
Weekly market share between the U.S. West Coast and East and Gulf Coasts in recent years has settled in around 70 percent to the West Coast. Average weekly volumes are 85,000 40-foot containers to the West Coast and 35,000 FEUs to the East and Gulf Coasts, Conrad said.
Equipment availability could be an issue at busy times of the year, as the production of new containers dropped in 2012 to 3.1 million units from 3.37 million units in 2011, he said. The cost of new containers increased from $3,850 per unit at the beginning of 2012 to $4,100 in December. That compares to $1,700 per unit five years ago.
If carriers in 2013 price for financial stability rather than market share, they can look forward optimistically to 2014 and beyond, Conrad said. New vessel deliveries will drop off sharply next year and will continue at a low level in 2015, allowing time for supply and demand to balance out, he said.