The U.S. import trade from Asia is a microcosm of the problems carriers face on the major east-west trade lanes this year. Container volumes are slightly higher than they were in 2012, but vessel utilization factors are lower and will drop again in November.
Containerized imports moving through West Coast ports are up 2 to 3 percent this year, but according to an analysis by the Transpacific Stabilization Agreement, vessel utilization during the first two weeks of September was in the 91 to 93 percent range, down from 97 to 98 percent during the same weeks last year.
“It’s due more to the capacity side than the volume side,” TSA Executive Director Brian Conrad said. The TSA is a discussion group of 15 carriers in the trade from Asia to the U.S.
Philip Damas, director of Drewry Supply Chain Advisors, told the South Carolina Foreign Trade Conference on Sept. 10 that the increase in global container ship capacity has averaged 7 to 8 percent a year over the past few years, with much of the increased capacity coming from vessels with capacities of 12,000 to 18,000 20-foot container units.
The ever-increasing size of vessels is a “fantastic growth story,” Damas said. Bigger ships are much more efficient than the 5,000-TEU Panamax-size vessels of yesterday, but this flood of new capacity on the east-west trade lanes is preventing carriers from achieving meaningful rate increases.
In today’s volatile market, carriers typically announce monthly general rate increases, only to see those increases deteriorate soon after they are implemented. “This is the nature of the market,” Damas said.
According to the comprehensive reading in the Shanghai Containerized Freight Index for the first week of September covering the major trade lanes originating in Shanghai, spot freight rates were 3.4 percent below the previous week and 15.5 percent lower than during the same week in 2012.
Drilling down to individual trade lanes, rates in the Shanghai-to-U.S. and Shanghai-to-Europe trade lanes were struggling. The SCFI index for shipments to the U.S. West Coast listed the average spot rate at $1,989 per 40-foot container for the first week of September, down 1.2 percent from the week before and down 20.1 percent year-over-year.
The SCFI index for shipments to the U.S. East Coast stood at $3,396 per FEU in the first week of September, down 0.5 percent from the previous week and 8.7 percent from the same week in 2012.
In the Shanghai-to-North Europe trade, the average spot rate was $1,073 per TEU, or 9.3 percent lower than the previous week. The spot rate was 16.4 percent below the same week last year. To Mediterranean base ports, the spot rate for the first week of September was $1,115 per TEU, or 7.9 percent below the week before and 15.8 percent below the same week in 2012.
The major trade lanes involving Asia are interconnected because of how carriers deploy new vessels. The largest container ships, including Maersk Line’s new 18,000-TEU Triple E vessels, normally enter the Asia-Europe trade. When those mega-ships are deployed, they displace 8,000- to 12,000-TEU vessels that typically are redeployed in the Asia-U.S. West Coast trade.
Some cascading of vessels also is occurring this year in the trade between Asia and the U.S. East Coast via the Suez Canal. Maersk, for example, discontinued its Panama Canal services to the East Coast and is now operating post-Panamax vessels through the Suez Canal to the East Coast.
An interesting phenomenon is occurring on all-water services between Asia and the U.S. East Coast. Although bigger vessels are being deployed through the Suez Canal, vessel utilization rates are higher compared to last year. According to the TSA numbers for the first two weeks of September, vessel utilization to the East Coast was running 94 to 97 percent, up from 87 to 89 percent during the same weeks last year.
Some of the difference can be attributed to last year’s impasse in dockworker contract negotiations on the East Coast. The trend, however, also indicates that volumes on the all-water services to the East Coast are increasing at a faster rate than to the West Coast. “There is continued interest in the Suez services,” Conrad said.
Although transit times from Asia to the East Coast are longer on the Suez route than the Panama route, the difference is not significantly greater from Hong Kong and points south. Conrad said the transit time from Hong Kong-Shenzhen and Southeast Asia to the East Coast is one to two days longer than through the Panama Canal. The Suez route is less competitive, though, from North China, Japan and South Korea to the East Coast.
As the peak season winds down, the volume growth rates and vessel utilization rates will not change dramatically, Conrad said. “These numbers are where they will be,” he said. When the peak shipping period begins to wind down in November, the growth numbers will taper off. There will probably be a spike in traffic in January, though, because Chinese New Year 2014 will be Jan. 31, somewhat earlier than usual.
Because factories in Asia will close for a couple of weeks beginning in early February, exporters will ship as much as they can by Jan. 31. Those vessels will arrive in the U.S. or Europe by mid-February. The trans-Pacific and Asia-Europe trades subsequently will be at their lowest points of the year for a couple of weeks. Carriers will likely cancel a number of voyages because of weak demand.
Carriers are hoping to raise rates in the trans-Pacific in mid-November despite the slack period, but prospects for successful implementation are dim. A bump in rates could occur in January because of the pre-Chinese New Year rush, but rates will decline in the winter before beginning to rise again in the spring.
The container trades also are affected by local economic conditions. Europe’s lengthy recession kept trade volumes flat to negative for most of 2013, and freight rates were under pressure for much of the year.
With imports into the U.S. up 2 to 3 percent this year, however, freight rates in the eastbound Pacific did not drop as much as they did in the Asia-Europe trade. In fact, the U.S. economy performed remarkably well in 2013 despite taking a number of “hits to the gut” in terms of an increase in the payroll withholding tax and the budget wars in Washington, said Bob Costello, chief economist at the American Trucking Associations.
Costello said the U.S. economy should register stronger growth in 2014, led by housing, automobiles and other manufacturing industries. Those industries produce a disproportionately large volume of ocean and domestic freight, so trade volumes next year could increase faster than gross domestic product as a whole, he said.
If the U.S. economy can register sustained growth of at least 3 percent for two to three quarters, economists expect a significant capacity crunch in trucking, which has not increased its capacity the way ocean carriers have.
Ocean carriers won’t be so lucky. Even if economic growth in the U.S. and Europe is stronger than expected next year, there is so much capacity overhang in the global shipping industry that vessel utilization rates are expected to be below what is necessary to give carriers greater pricing power in the east-west trade lanes.