If It Moves, Charter It

If It Moves, Charter It

Copyright 2004, Traffic World, Inc.

The liner industry is learning to adjust to record-high and still rising charter costs and a shortage of short-term ship availability, albeit painfully. With demand rising on trans-Pacific and Euro-Asia trade lanes, the outlook for any charter rate relief remains more than a year away.

Even with rates sky high, larger container carriers continue to scoop up new vessels on long-term charters well before they come on the market. But smaller lines and feeder services are reducing some services to save on charter costs. Charters are critical for smaller carriers because on average more than half their fleets consist of chartered vessels.

Larger carriers, which can more easily absorb the cost of charters, are starting new services or adding capacity on more profitable routes, especially in the trans-Pacific or Asia-to-Europe trades.

But "they are shaping their services around the tonnage that''s available, rather than building a new service and then trying to find tonnage to match the service," said Peter Shaerf, senior vice president of American Marine Advisors, a New York-based maritime investment bank. "They are doing more focused planning, more due diligence about what''s available and more pooling and dependence on alliances."

But even the world''s largest carrier, Maersk Sealand, is having trouble finding the charter vessels to start new services. "New services that would add value to our customer''s supply chain have not been brought forward due to the lack of vessel supply," said Craig Mygatt, Maersk''s director of Central America Caribbean Services. "The smaller the market, the more difficult the economies."

The carrier is trying to maintain market coverage even in "segments where the volume and pricing of cargo make it extremely difficult to operate profitably," Mygatt said. "There is a lack of supply globally, and Maersk Sealand would like to cover clients'' needs in all cases.

"Unfortunately, this situation has left many customers without tonnage to meet their needs."

APL, the seventh-largest liner company, is gearing its capacity to meet customers'' needs in all trade lanes, said John Bowe, president of APL Americas. "Customer demand and our focus on yield drive our deployment strategy rather than the charter market," he said. "Our partnerships with other carriers and the way our networks are configured mean we can flex capacity up or down and move equipment to where customer demand - and returns - are high."

APL is expanding its fleet despite the tight and pricey charter market, Bowe said. "We have, for example, four vessels on midterm charter to be delivered over the next two years," he said.

In addition, APL just secured four post-Panamax ships on long-term charter from Mitsui & Co. for delivery in 2007 and 2008. "We guard against high charter rates by negotiating long-term deals at competitive prices. We secured the Mitsui ships at $24,300 a day - rates comparable with those of five years ago," he said.

Bowe said charter rates could remain high this year and into next, "if, as seems likely, the shift of production and sourcing to Asia continues to drive demand." High charter rates cost APL $7.4 million in the first half of 2004 and are likely to add another $22 million by the end of the year. He is not expecting any relief this year. "Perhaps next year," he said.

In China, the source of much of the hunger for new capacity, Beijing''s efforts to put a damper on the Chinese economy have brought some relief in the dry-bulk charter market, which has seen rates fall by more than half since their March highs.

But this has had little impact on container charters, says Duncan Brown, director of Harper Petersen & Co., a ship broker in London and Hamburg. "The container charter market is still pretty strong, about where it was a month ago."

Many smaller carriers are looking at their needs for the peak season. "They may think they''ve got them covered, but they will still face shortages of tonnage available for short-term charters," Brown said. He said shipowners are demanding charters of three to five years for vessels in the 1,700-TEU range. Rates for such vessels are three times as high as they were a year ago, when carriers could charter a vessel for 12 months, he said.

The daily charter rate for the benchmark 1,700-TEU geared ship has risen by $2,100 since April to $23,000, driven by strong demand in the Far East. A 3,500-TEU Panamax vessel is fetching $34,500, up from $33,500 three months ago, says H. Clarkson, another London ship broker.

"The smaller carriers that have left it until the last moment are having to pay these high rates," Brown said. "There''s a lack of ships, especially in the 1,000-TEU range."

Some shipowners are willing to charter on the spot market for shorter periods that only run until the fall, when they expect an even stronger market. Although longer-term contracts offer a discount of 10 percent or more over deals of six to 12 months, smaller carriers are reluctant to tie themselves down at high rates for the longer term.

But shipowners are confident they can continue to command the high rates. "With every passing week, owners will no doubt feel confident in levels as more slots will need to be filled for the peak season," Brown said. He said he expects rates to stay high at least until next spring, when new ships coming onto the market will provide some relief.

In the meantime, carriers large and small are adjusting routes and services. "In general, lines are not making announcements of changes. They may take a vessel out of service here or there, and put it into another service for one or two trips, but they are haphazard and fairly indiscriminate," Brown said.

For example, the high cost of charters is leading a group of carriers serving the Gulf of Mexico, Caribbean and east coast of South America to pull one vessel out of its rotation while maintaining the same number of slots.

The agreement among Alianca, Hamburg Sud, P&O Nedlloyd and Mercosul Line plans to withdraw one ship from its U.S. Gulf-Caribbean-Mexico-east coast of Latin America rotation. This will allow the agreement to save the cost of a chartered vessel and reduce the rotation cycle to 42 days from 49.

Another change forced by the high charter costs is the CKYH alliance of Cosco Container Lines, Yang Ming, "K" Line and Hanjin Shipping, which is shifting some larger vessels to the trans-Pacific trades and replacing them with smaller vessels from the Mediterranean. Kazuyuki Oda, senior vice president of operations for "K" Line North America said the step is the result of the "very tight" charter market.

And when when charter contracts run out, carriers may have to replace them at rates three times as high as their old charters, if they can find vessels available. If they can''t, they are forced to reduce services or capacity.

Hanjin and its majority holding, Senator Lines, are cutting one ship from their nine-vessel Asia-Mediterranean service because of the shortage of vessels available to replace charter vessels at the end of their contracts, according to BRS-Alphaliner. Senator had to return three, 2,680-TEU chartered vessels to Mediterranean Shipping. Senator was able to charter two smaller ships, but couldn''t find a third, so it had to cut its rotation.

The biggest carriers are still charging full-speed ahead, starting new services to meet demand on the Pacific, whatever the cost of charters.

MSC is using two of the three chartered vessels it took over from Senator Lines to fill out the eight-vessel rotation on its Tiger Express service from Asia to the eastern Mediterranean. It chartered these vessels more than six months ago in anticipation of its needs and waited to take delivery until this month when the contracts ran out.