SHENZHEN, China — Container rates will be even more volatile over the next 12 months, as liner consolidation is unlikely and the proposed alliance between the world's three largest carriers will increase competitive pressure on pricing, according to an executive consultant at Alphaliner.
The proposed pact between Maersk Line, CMA CGM and Mediterranean Shipping Co., known as the P3 Network, will cause more rate volatility, despite many commenters forecasting the opposite, Tan Hua Joo said. The G6 Alliance — the partnership of APL, Hapag-Lloyd, Hyundai Merchant Marine, MOL, NYK Line and OOCL — didn’t stabilize rates, and the P3 won’t fare any better in that aim, he said at The Journal of Commerce’s 7th Annual TPM Asia Conference in Shenzhen, China.
If approved, the P3 will allow the container lines to reduce their operating costs, but there is concern among shippers that service reliability will suffer as a result.
Tan said the capacity overhang will continue to plague the industry until 2016, at least. Scrapping overcapacity has helped remove the glut of vessel space, but idling ships isn’t an effective way to remove capacity. Moreover, slow-steaming of ships, a practice carriers introduced during the recession to cut fuel costs and improve their carbon footprint, is reaching its upper limit, he said. The overhang is exacerbated by moderate demand, which is growing at less than half the rate at which capacity is increasing.
The industry has about 5 percent more capacity than it needs, the result of deliveries expanding 37 percent over the last five years while scrapping and slow steaming have taken only 15 percent out. Demand has grown approximately 16 percent in the same period. The level of idle capacity, at 450,000 20-foot-equivalent units and rising, is the most severe in history.
Tan said carriers will add 1.9 million TEUs of capacity over the next 15 months, expanding the total fleet space by 11.1 percent. Twenty-one carriers will take 1.5 million TEUs of the new capacity, equating to an 8.7 percent expansion of the fleet.
The dire situation means carriers will have a hard time getting contract hikes for 2014, and it’s unlikely carriers will be able to maintain a November general rate increase of about $1,000 per TEU. “I think (the GRI push) will fail in the same way it failed last year,” Tan said.
The prospects of industry consolidation aren’t good for the next 12 months, either, because political hurdles remain and carriers still have access to capital markets to finance the building of larger ships. Carriers continue to seek larger ships in an effort to bring down unit costs.
This trend is particularly prevalent in the Asia-Europe trade, the largest global lane. The average size of vessels on the lane grows by about 1,000 TEUs ever year, with the average ship now having a 10,000-TEU capacity. Two years ago the average vessel had capacity of 8,000 TEUs. The more efficient vessels have reduced carriers’ unit operating costs by $100 to $200, but those efficiency gains are largely lost to price slashing.
Although carriers are managing their capacity better on the Asia-Europe trade, they're reluctant to take out more. Capacity on the lane is down about 2 percent in the lane after every major alliance traversing the trade has reduced vessel space. Despite capacity tightening, the resulting gains in rates will be short-lived, Tan warned.