To Pacific Importers: Expect Sailing Cancellations

To Pacific Importers: Expect Sailing Cancellations

China factory workers, camera plant

A shipping executive in the trans-Pacific trade told importers to expect more canceled sailings than usual during the annual Chinese New Year celebration because many factories in Asia will stay closed for as long as three weeks beginning in February.

Factories in Asia normally close down for one to two weeks so workers can return to their homes in distant villages to celebrate the Lunar New Year. Carriers often cancel some scheduled weekly sailings because cargo volumes drop sharply.

Feb. 10 is the official beginning of the lunar year celebration this year, but some factories will reportedly shut down early or stay closed beyond the normal one to two weeks, David Arsenault, vice president of Hyundai Merchant Marine, told the Propeller Club of Los Angeles-Long Beach Wednesday.

Orders from Europe are unusually weak this year as the continent remains in an economic recession. Factories in Asia plan to stay closed longer than usual, affecting production not only for the European market but for the U.S. as well.

A number of ocean carriers recorded back-to-back financial losses in 2011 and 2012 in their global operations, so they are keen to reduce operating costs wherever they can, Arsenault said. Canceling some normally scheduled weekly sailings is a strategy they deployed last year, and they may cancel even more sailings this year, he said.

Right-sizing their fleets to meet seasonal demand during the course of the year is another strategy in vogue as carriers attempt to keep their vessel utilization rates at 90 percent on various trade lanes, Arsenault said. Carriers can be expected to suspend entire services during periods of slack demand.

Last year, carriers experienced utilization rates of close to 80 percent in the Asia-Europe trade, and freight rates predictably dropped in that lane. Asia-Europe is where most of the newly launched vessels with capacities of 12,000 to 15,000 20-foot containers end up.

Somewhat smaller vessels of 8,000- to 10,000-TEU capacity are bumped from Asia-Europe to the trans-Pacific. Also, the trans-Pacific trade fared better than the Asia-Europe trade in 2012 as the U.S. economy strengthened. Therefore, carriers were able to keep their vessel utilization rates at 90 percent or higher in the trans-Pacific for much of last year, Arsenault said.

Nevertheless, freight rates in the trans-Pacific were unusually volatile last year, with carriers announcing a half-dozen general rate increases or surcharges. The normal scenario was for carriers to implement a rate increase of, say, $400 per 40-foot container, and then each week reduce the GRI by $100, only to implement another $400 GRI the following month, he said.

The days of 10 percent annual growth in cargo volume are over, and increases of 3 to 5 percent are the new norm for growth in the container trades. Global container capacity last year increased more than 7 percent, and is scheduled to increase almost 10 percent this year, so carriers will have to exert more discipline to keep rates from collapsing.

However, orders for vessels scheduled for delivery in 2014 and beyond have dropped off sharply, so the global container trades should begin to trend toward supply-demand equilibrium beginning next year, Arsenault said.

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