Ocean carrier efforts to shed surplus 8,000 20-foot-equivalent unit ships by dumping them in the Asia-east coast South America trade have triggered a collapse in freight rates, according to industry analyst Drewry.
The strategy of “cascading” the ships from the Asia-Europe trade to South American routes “appears to have seriously backfired and painted (carriers) into a corner,” the London-based analyst said.
The launch of MSC’s Ipanema service in mid-April and the subsequent announcement that rival carriers will deploy 8,000-TEU vessels will boost capacity on the route by 33 percent between April and July.
By contrast, the trade from Asia to the east coast of South America trade grew just 4.7 percent in the first quarter to 343,000 TEUs and the backhaul leg to Asia expanded 12 percent to 132,600 TEUs. The gross domestic product of Brazil, South America’s biggest economy, inched up 0.6 percent in the first three months of the year.
A rate war has broken out even before all the bigger ships have arrived with spot prices from Shanghai to Santos, Brazil, plunging 26 percent between April and May to $2,810 per 40-foot container.
“Anecdotal evidence indicates that since the middle of April, the decline was even higher, and rates were still dropping in the first week of June, indicating that no one wants to be muscled out of market share peacefully,” Drewry said.
In addition to MSC’s new service, Evergreen, Cosco and Zim Integrated Shipping Services upgraded ships deployed in their joint service from an average of 6,212 TEUs to 8,500 TEUs. And starting next month, Maersk Line, CMA CGM, Hamburg Sud, CSCL, CSAV and Hanjin Shipping are rationalizing services, using 33 vessels averaging 8,000 TEUs each into the trade, a shift from the 35 vessels averaging 6,295 TEUs each currently.
MSC appears to be at a disadvantage as its service is deploying 11 4,500-TEU ships that have lower economies of scale than the larger vessels of its rivals. But the Swiss carrier’s ships were chartered at a “very attractive” rate of around $6,000 a day.
The additional capacity planned for July will result in further rate erosion, according to Drewry.
“As much as ocean carriers would like to hide surplus 8,000-TEU vessels in the north-south trade lanes, this cannot be achieved in the current poor economic climate without creating overcapacity and rate reductions.”