From TPM: Smart Strategy Would Deter Rate War, Consultant Says

From TPM: Smart Strategy Would Deter Rate War, Consultant Says

LONG BEACH, Calif. — There will be a net overcapacity of at least 6 percent in the eastbound Pacific this year, but if carriers take the proper actions at the right times to match capacity with demand, they may be able to avoid a ruinous rate war for the second year in a row, according to an industry analyst.

Container lines in 2012 implemented some of the largest general rate increases ever despite the spread of more than 8 percentage points between gross capacity additions and total demand in the eastbound Pacific, Tan Hua Joo, executive consultant at Alphaliner in Singapore, told attendees of the 13th annual TPM Conference Monday, sponsored by The Journal of Commerce.

“The question is, do supply and demand really matter?” Tan asked. Carriers successfully implement rate increases for one of two reasons. Either because they are consistently experiencing high utilization rates of 90 to 95 percent, or they are losing so much money that they must increase rates to survive, he said. It was the latter reason that saved them last year, and it can possibly happen again this year.

Carriers in 2012 were able to reduce effective capacity by idling ships, accelerated vessel scrapping and slow-steaming. While those actions propped up vessel utilization rates to a degree, the strategies alone cannot explain why carriers were able to implement a series of rate hikes in the eastbound Pacific, Tan said.

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Shipping lines, fearing the industry might be pushed into a new round of consolidation by the overcapacity, exerted “newfound discipline” and implemented several rate hikes last year, he noted.

It is not certain yet if carriers will maintain such discipline throughout 2013. They will certainly be hard-pressed to do so because gross capacity will increase 10 percent, the highest-ever rate of capacity additions, Tan said. All but two of the major carriers are taking delivery of new vessels this year, so the increase in capacity will be spread throughout the industry.

Carriers are already taking steps to reduce the impact of this new capacity. More than 30 vessel sailings have been or will be canceled in the weeks following the Chinese New Year celebrations in Asia. About 5 percent of the active fleet has been scrapped, and about 10 percent of the global fleet is underemployed. A small number of vessels that are scheduled for delivery this year will be pushed back to 2014.

As a result of these actions, the effective increase in capacity in the Pacific will be about 6 percent, but eastbound demand will increase only about 2 percent, Tan said. Also, capacity deployments to the East Coast will change as some services through the Panama Canal with vessels of less than 5,000 TEU-capacity will be discontinued, and they will be replaced with lower-cost Suez services deploying ships with capacities up to 9,000 20-foot container units.

Carriers don’t like to cancel sailings because ships are quite costly, but they do save millions of dollars in fuel and operating costs when the ships are idled, Tan said. If carriers react quickly to reduce capacity when cargo volumes are weak, while maintaining coverage of the trade lanes through vessel-sharing arrangements, they may maintain enough discipline to at least prevent rates from dropping sharply, he said.

Contact Bill Mongelluzzo at bmongelluzzo@joc.com and follow him at twitter.com/billmongelluzzo.