Conventional wisdom and economic logic, it seems, are two ideals shipping lines operating in the world’s largest ocean trade really don’t care to acknowledge. How else to explain Asia-Europe carriers’ attempt to push through steep rate increases amid cargo growth that’s advancing at a snail’s pace, a persistent glut of capacity and increasingly volatile spot pricing — and doing it during the traditionally weak fourth quarter that followed a second consecutive flat peak season?
Yet carriers appear relatively optimistic about the fate of general rate increases of up to $1,000 per 20-foot container that kicked in on Nov. 1 in the Asia-North Europe trade, as they peer anxiously ahead to the second quarter of 2014, when the P3 Network among the industry’s Big 3 — Maersk Line, Mediterranean Shipping Co. and CMA CGM — hits the troubled trade.
Despite sluggish cargo growth, carriers had a pretty good summer as the sizable freight rate increases secured in the Asia-North Europe trade at the beginning of July held firm through August, according to Drewry Maritime Research. Since then, however, the average all-in spot freight rate from Shanghai to Rotterdam has crumbled from $2,498 per 40-foot container on Sept. 5 to just $1,278 on Oct. 24, a decline of almost 50 percent.
Asia-Europe rates more than doubled in the week before the November GRIs, but it’s unlikely the rally will survive the month. With average vessel utilization averaging more than 90 percent, the only logical explanation for the “inexplicable” rate slump out of Asia prior to the sudden rally is that the poor peak season and the onset of the European winter panicked some carriers into cutting prices to boost market share, London-based Drewry said.
The slump in rates for spot cargo from Asia to North Europe “defies logic, suggesting that something unusual is happening,” Drewry says. “It cannot be ruled out that the spot market has temporarily parted company with the overall freight rate market, so may no longer be a guide to ocean carrier sentiment. If past practice is anything to go by, this will not last long, as forwarders still rule the roost in the trade lane.”
The dire state of the Asia-Europe market, notwithstanding the recent spot rate rally, was highlighted in a third quarter trading update from Hong Kong’s OOCL, one of the industry’s most highly regarded operators. OOCL’s traffic on the route during what is traditionally the busiest quarter of the year slid 14 percent from a year earlier to 208,544 20-foot-equivalent units, revenue plunged 22.4 percent to $264 million, and average revenue per TEU was 6 percent lower at $1,269.
Carriers have sought to rebalance surplus supply and depressed demand by skipping some voyages, a strategy known as “blank sailing.” Industrywide capacity is down less than 4 percent from the fourth quarter of 2012 but is likely to rise as lines respond to lower cargo volumes going into the European winter. Carriers also are reining in capacity by super-slow-steaming their vessels. That has increased the average duration of an Asia-North Europe string by 21 days — to 11 weeks — since 2006, according to industry analyst Alphaliner.
The outlook has improved on both legs of the trade in recent weeks. China’s economic growth accelerated for the first time in three quarters, with GDP rising 7.8 percent in the third quarter from a year earlier and expected to continue growing, albeit at a more modest pace in the current quarter. Japanese exports to the 28-nation European Union jumped 14.3 percent year-over-year in September following an 18 percent surge in August.
The return leg also is looking a lot healthier. The recovery in the 17-nation eurozone is expanding after its longest recession ever, with consumer confidence rising for the 11th consecutive month in October. Countries outside the currency bloc, including the U.K., Europe’s third-largest economy, also have returned to growth, and automobile sales across the continent increased at the fastest rate in two years in September.
Carriers are desperate for this economic pickup to translate into higher cargo volumes on both legs of the world’s largest, but slowest-growing, trade lane. Traffic on the Asia-North Europe route grew just 1 percent in the first eight months of 2013 from the year-earlier period to 6.2 million TEUs, according to the latest figures from industry analyst Container Trades Statistics. The peak season was a non-event too, with traffic rising to 844,000 TEUs in August from 837,000 in July and 793,000 in June.
But the industry shouldn’t bet the house that traffic growth will pick up any time soon. China’s recovery could falter under the weight of the yuan’s appreciation, relatively weak emerging markets and a slowing in manufacturing investment, and Japan’s export growth rate is slowing. The eurozone’s modest rebound also could be blown off course by Italy, its third-largest member, which has a potential growth rate of zero.
Even as they keep an eye on the key Asian and European economic indicators, carriers are trying to gauge the potential impact of the P3 Network, which, if approved by U.S., European and Chinese regulatory authorities, will control some 50 percent of Asia-Europe capacity.
But the impact will be minimal in the Asia-Europe trade, because the P3 plans to increase capacity on the route by just 2.25 percent compared to the beginning of September. There will be one less weekly Asia-North Europe service, though this will be outweighed by a 14 percent increase in average ship size to 13,032 TEUs, including the deployment of additional 18,270-TEU Triple E Maersk vessels. The number of weekly Asia-Mediterranean services would decline from six to five, but weekly capacity likely will remain unchanged because of the deployment of bigger vessels.
There’s a chance the P3 could be barred from the Asia-Europe trade because its market share is well above the 30 percent maximum threshold permitted by the European Union’s consortia regulations.
The P3 likely will draw a response from rival carriers just as the announcement of the Daily Maersk service a couple of years ago led to a partnership between MSC and CMA CGM, which in turn triggered the establishment of the G6 Alliance between the member lines of the New World and the Grand alliances.
As usual, all eyes will be on Maersk, even more so after it stunned rival carriers and industry analysts with a $439 million second quarter profit driven largely by sharply lower costs. While cautioning that “a deflationary mind-set is needed” amid overcapacity and slow growth rates, Maersk reiterated to investors in September its determination to defend its 15 percent global market share, including 20 percent of the Asia-Europe trade, while growing at the same rate as the market. “Giving up market share would make us irrelevant in 10 years,” Maersk Line CEO Soren Skou said in a Capital Markets Day presentation in Copenhagen.
The static state of the Asia-Europe trade and the prospect of prolonged rate weakness as bigger ships are deployed probably played a key role in Maersk Line parent A.P. Moller-Maersk’s recent decision to lower the short-term target for return on capital invested in the carrier to 8.5 percent a year from 10 percent. The long-term target was held at 10 percent.
Maybe the best carriers can hope for is to cap their Asia-Europe losses by reining in costs and spurning unprofitable cargoes, and focus on their more promising north-south and intraregional routes until the trade returns to stronger growth.
For now, the Asia-Europe trade is trapped between a rock and a hard place. Drewry called the Nov. 1 GRIs “crazy,” but at the same time said carriers must make them stick “if contract freight rates are to be increased next year.”
Contact Bruce Barnard at email@example.com.