The outlook for the success of the freight rate increases the major ocean carriers have announced for July 1 on many global trade lanes is decidedly mixed. With the overcapacity of vessel space still hanging over all trades, will these new attempts to get rates up fare any better than they have so far this year?
Shippers have become inured to the almost monthly increases in the Asia-Europe trade and bimonthly in the trans-Pacific because they have seen rates drop off after the initial increases. But the sheer number of announcements of July 1 GRIs in those two trades, in the trans-Atlantic and in the north-south trades as well is unprecedented. It indicates carriers may be trying to elevate rates globally and simultaneously. It is not a collective effort, but rather a series of copy-cat announcements. Every time one major carrier announces a July 1 GRI, other carriers have played follow the leader.
Carriers have tried to implement monthly GRIs in the Asia-Europe trade this year, but they have been only briefly successful, with the higher rates lasting a week or two at most before the continuing rate war led to rates dropping below where they were before the increases. Current spot market rates in the Asia-Europe trade are 64 percent lower year-over-year, according to Alphaliner. The success of the June 1 GRI that some carriers implemented in the Asia-Europe trade will become evident later this week in the SCFI data issued by the Shanghai Shipping Exchange. The index showed rates to northern European ports continue to fall in the weekend ending May 31, for the 11th straight week.
“Asia-Europe rates are about where they were post-Lehman in 2009,” said Ron Widdows, CEO of Rickmers Holdings. “That’s a level where there are a lot of carriers burning cash.”
That may change with the July 1 increase, which SeaIntel CEO Lars Jensen expects to be quite successful. “Rates are hitting rock-bottom in the Asia-Europe trade and getting close to the point where we saw the rate war abate toward the end of 2011, where they have no choice but to stand firm,” he said.
“Secondly, the losses the carriers are sustaining are becoming too large for any of them to bear, which means you will see an element of discipline.”
Jensen expects the carriers to be quite effective in pushing through increases on July 1 and once again around Aug. 1. Carriers will probably start to void some sailings to sustain rate increases through the summer. But Jensen said rates will start to erode “very rapidly” in the fourth quarter. “The way the European economy is going, I would not keep my hopes up for additional volume. “My view is that we never saw the rate war end. It’s been ongoing since the middle of 2010; it’s just been disguised by a couple of increases here and there,” he said.
Rates have held up better in the trans-Pacific trade, where three GRIs so far this year have not led to rates dropping off as steeply in their aftermath as in the Asia-Europe trade. Nevertheless, spot rates in the trans-Pacific to the U.S. West Coast are also 14 percent lower year-over-year.
Jensen is not as confident trans-Pacific rates will firm up on July 1. “The pain is not as acute for the carriers as in the Asia-Europe trade, so it’s a lot harder for them to maintain discipline.”
The entry of United Arab Shipping Co. into the trans-Pacific trade with three services in cooperation with China Shipping Co. has introduced a “wild card” into the rate equation. “If the other carriers view this as relatively small volumes, you might get some rate increases,” Jensen said. “But if they decide they don’t want to allow more players into the trade without a fight, that could undermine any efforts at getting rates up. Which way it is going to blow is impossible to get a read on yet.”
Over the longer term for the rest of this year and into 2014, carriers will not be able to get rates up to a truly sustainable level unless they address the mounting glut of capacity as ever more new post-Panamax ships continue to be delivered. Alphaliner forecasts new vessel deliveries will add 6.6 percent to the global container fleet this year and 7.3 percent next year. Carriers have made few reductions in capacity this year aside from occasional voiding of sailings and suspension of some services during the winter months.
This year is going to be a decidedly difficult time for the industry and will take quite some time to work its way through,” Widdows said. “Next year, too, unless carriers can develop the resolve to lay up a hell of a lot of ships.”
In 2009 going into 2010, after a year in which they suffered huge losses, carriers laid up vessels with a collective capacity of 1.5 million TEUs, which triggered the rate improvement in 2010.
“Based on the fleet today, they would have to lay up between that (amount) and 2 million TEUs in order to tighten capacity enough to have some effect on rates,” Widdows said. ‘Desperation is always a good motivator, but it hasn’t gotten to the point yet where it triggers that behavior.”