Carriers are unlikely to stem the decline in freight rates in the Asia-to-North Europe trade lane any time soon, even if the general rate increases they plan to implement later this week boost spot rates for a few days.
Carriers were able to sustain high vessel utilization rates through a combination of canceled sailings and some service suspensions in the weeks leading up to the Chinese New Year celebration, when Chinese factories shut down for two weeks starting Feb. 10, but spot rates in the Asia-Europe trade dropped below $1,000 per 20-foot-equivalent container in the week of March 8, marking the seventh straight week of decline, with rates falling 29.5 percent or $419 per TEU since Jan. 11.
“Carriers were able to manipulate the situation so they were full going into the Chinese New Year, when demand was up, but demand has plummeted since then,” said Simon Heaney, research manager at Drewry in London. “We estimate that vessel utilization has gone from 100 percent in January to 70 percent in February because of supply and demand fundamentals.”
Demand has fallen so precipitously that the CKYH Alliance of Cosco, “K” Line, Yang Ming and Hanjin Shipping announced plans on March 11 to suspend its NE1 Asia-Europe loop and not to resume the NE4 service that it cut back in October of last year. The alliance had reportedly been planning to resume the NE4 service in May.
Similarly, the G6 Alliance announced in January it would not resume sailings of its Loop 3 service between the Far East and Europe covering all major ports with weekly sailings. Adjustments have also been made to the group’s five other Asia-Europe services to accommodate port calls from the Loop 3 service, which the group had suspended in October. The G6 Alliance consists of APL, Hapag-Lloyd, Hyundai Merchant Marine, MOL, NYK Line and OOCL.
Asia-Europe carriers have announced plans to put a general rate increase, ranging from $600 to $700 per TEU, into effect in mid-March, but it remains to be seen how long the increase will last. “Carriers are doing their best to remedy the supply situation with these canceled sailings, but effectively it’s tinkering around the edges and not addressing the underlying overcapacity issue in that trade.”
Vessel capacity in the Asia-Europe trade is expected to increase 4 percent this year, while demand is only forecast to grow 1 percent, Alphaliner executive consultant Tan Hua Joo told The Journal of Commerce’s 13th annual TPM Conference last week. He said freight rates increased sharply last year despite overcapacity and weak demand, but that it’s “overly simplistic to assume that carriers can repeat 2012 performance in 2013.”
Demand is likely to pick up in the Asia-Europe trade in the next few weeks, but whether it is strong push vessel utilization rates up to levels where they can sustain the rate increases remains to be seen, Heaney said.
Asia-Europe carriers have scheduled another GRI for April 1, when they plan to implement increases ranging from $750 to $775 per TEU.
Regardless of the supply-demand equation prevailing on the trade, the success of the carriers’ rate increases will come down to their ability to maintain discipline. “It’s up to the resilience of carriers to make sure these things stick,” Heaney said. “But if the supply-demand fundamentals are appalling, there’s a limit to how far they can push it.”