Space: the perennial challenge
How soon will lines reintroduce tonnage?
A lot can happen in a year, and nowhere has that been more evident than in the ocean freight sector.
At the start of 2009, spot rates dropped as low as US$350 on services from Asia to Europe as carriers fought for market share.
Analysts said the low rates were caused by the oversupply of vessel capacity as volumes dramatically declined when the western world entered its worst recession since the great depression of the 1930s.
In the first quarter of 2009, westbound Asia-Europe volumes recorded by the European Liner Affairs Association (ELAA) were just over 22% down on the same quarter in 2008. The situation failed to improve in the second quarter, as volumes remained 22% down.
With low rates and low volumes it was inevitable that carriers’ financial results for the first-half would not be impressive – the world’s biggest container carrier, Maersk Line, reported a loss after tax of $961m, compared with a profit of $278m in the same period of 2008.
But while carriers were reporting mounting losses, they were also reducing capacity by laying-up tonnage and slowing vessels.
The percentage of the world’s containership fleet that was laid-up grew from 4.5% at the start of 2009 to 11.3% in March, according to analyst AXS Alphaliner. It ended the year at 11.7%.
Byron Lee, MD of Hong Kong-based forwarder China Global Lines, says it was understandable that carriers had taken action to reduce capacity out of China.
“They had to do something to earn some money back, when they were all hurting so badly. Rates were almost as low as $200/teu all-in this time last year to Europe,” he says.
As the year progressed, volumes slowly started to creep up towards 2008 levels. During the third quarter, ELAA figures showed westbound volumes at just over 13% down, year-on-year, and in the fourth quarter, just 0.25% down.
As volumes started to improve, forwarders were suddenly faced with a situation in which they couldn’t find space on ships. In November, contacts were reporting cargo was being rolled – booked on a ship, but then being held back for another – for up to two weeks.
The fight for space meant rates began to increase. The ELAA’s pricing index for Asia to Europe revealed that rates had reached almost 90% of the average level for 2008 by the start of December 2009, and continued to rise into 2010 .
Reported all-in spot rates exceeding $2,000 per teu in January were described by Philip Damas, of consultant Drewry, as the highest level recorded for at least 10 years.
Even in February’s Chinese new year lull, when factories closed for around two weeks, shipping lines managed to sustain their all-in spot rate levels at around $2,100 per teu.
The question is: when will rates start to decrease?
China Global’s Lee predicts that with rates now over the $2,000/teu mark and so much capacity laid-up, eventually one of the carriers will break ranks.
“Someone will take a risk and put more tonnage back in to win market share,” he says. “When that happens we’ll probably see another rate war.”
But will carriers reintroduce tonnage after the glut of capacity last year?
Damas points out that space on ships has been tight for a while, and so far carriers have been disciplined enough not to reintroduce tonnage to grab market share.
“There has been a considerable amount of discipline among the carriers, and it looks likely that they will maintain that for the first half of 2010,” he says.
Drewry expects average global container freight rates, including fuel surcharges, to be about 15% higher than last year, and believes the potential for further increases in spot rates is limited.
Dutch liner analyst Dynamar’s senior shipping consultant, Dirk Visser, is also impressed by the discipline shown by the carriers.
“I look at what they are doing at the moment with some admiration, because they struggled to do this even when conferences were allowed,” he says.
Researcher Transport Trackers believes the immediate post-Chinese new year period is key to understanding how much tonnage carriers will re-introduce.
“Effective capacity reductions through slow-steaming and lay-ups is working on increasing effective specific trade utilisations to the point where some may add capacity,” it says. “No one knows how strong markets will be in Q2 and Q3 in 2010, but if strength resumes post-new year, then lines will consider adding back capacity. Then rate haggling will start over again.
“The liner industry is enjoying strong rate action now, but nothing is clear for the remainder of the year, except that it is not likely to be as poor as last year.”
Visser agrees: “Lines kept rates high until the Chinese new year, but if volumes stay reasonably high, how long can they resist the temptation to put in additional ships? Whoever does will be followed.”
However, Transport Trackers says that one thing that may stop carriers trying to grab market share is that last year’s rate war failed to have too much of an effect on competitors.
“Why cut rates if you think you are going to pressure the competitor?” it asks. “They’ll simply run to their government to get a bail-out or guarantee.”
But it appears carriers are already starting to move on re-introducing capacity.
One leading China-based forwarder said some lines were already sounding-out customers about the introduction of more capacity. And AXS Alphaliner says the percentage of the global fleet that is laid up slipped below 10% in February.
This month, Wan Hai Lines and Pil will launch a weekly Asia-Europe service, using nine 4,250teu ships, while CSAV Norasia starts a ten 5,000teu-vessel service between China and the western Mediterranean. There are also rumours that the CKYH Alliance of Coscon, K Line, Yang Ming and Hanjin, plus another unnamed major carrier, also have plans for new services.
But Visser says this does not necessarily mean rates will decline.
He says: “Late last year, some carriers had already offered extra loaders – ships added to services for one rotation to pick up cargo that couldn’t be loaded – and if volumes keep up, the additional operations should not represent too much of a problem for the rate levels if they, in fact, replace those loaders.”
However, he said the impact of new entrant to the trade, the Containership Company (TCC) was unknown.
It is understood TCC will introduce an Asia-Europe service using vessels of around 5,000teu.
“TCC is a bit of a wild card, as it may have to fight to get itself into the market via the price instrument,” says Visser.
At the start of 2009, spot rates dropped as low as US$350 on services from Asia to Europe as carriers fought for market share.
Analysts said the low rates were caused by the oversupply of vessel capacity as volumes dramatically declined when the western world entered its worst recession since the great depression of the 1930s.
In the first quarter of 2009, westbound Asia-Europe volumes recorded by the European Liner Affairs Association (ELAA) were just over 22% down on the same quarter in 2008. The situation failed to improve in the second quarter, as volumes remained 22% down.
With low rates and low volumes it was inevitable that carriers’ financial results for the first-half would not be impressive – the world’s biggest container carrier, Maersk Line, reported a loss after tax of $961m, compared with a profit of $278m in the same period of 2008.
But while carriers were reporting mounting losses, they were also reducing capacity by laying-up tonnage and slowing vessels.
The percentage of the world’s containership fleet that was laid-up grew from 4.5% at the start of 2009 to 11.3% in March, according to analyst AXS Alphaliner. It ended the year at 11.7%.
Byron Lee, MD of Hong Kong-based forwarder China Global Lines, says it was understandable that carriers had taken action to reduce capacity out of China.
“They had to do something to earn some money back, when they were all hurting so badly. Rates were almost as low as $200/teu all-in this time last year to Europe,” he says.
As the year progressed, volumes slowly started to creep up towards 2008 levels. During the third quarter, ELAA figures showed westbound volumes at just over 13% down, year-on-year, and in the fourth quarter, just 0.25% down.
As volumes started to improve, forwarders were suddenly faced with a situation in which they couldn’t find space on ships. In November, contacts were reporting cargo was being rolled – booked on a ship, but then being held back for another – for up to two weeks.
The fight for space meant rates began to increase. The ELAA’s pricing index for Asia to Europe revealed that rates had reached almost 90% of the average level for 2008 by the start of December 2009, and continued to rise into 2010 .
Reported all-in spot rates exceeding $2,000 per teu in January were described by Philip Damas, of consultant Drewry, as the highest level recorded for at least 10 years.
Even in February’s Chinese new year lull, when factories closed for around two weeks, shipping lines managed to sustain their all-in spot rate levels at around $2,100 per teu.
The question is: when will rates start to decrease?
China Global’s Lee predicts that with rates now over the $2,000/teu mark and so much capacity laid-up, eventually one of the carriers will break ranks.
“Someone will take a risk and put more tonnage back in to win market share,” he says. “When that happens we’ll probably see another rate war.”
But will carriers reintroduce tonnage after the glut of capacity last year?
Damas points out that space on ships has been tight for a while, and so far carriers have been disciplined enough not to reintroduce tonnage to grab market share.
“There has been a considerable amount of discipline among the carriers, and it looks likely that they will maintain that for the first half of 2010,” he says.
Drewry expects average global container freight rates, including fuel surcharges, to be about 15% higher than last year, and believes the potential for further increases in spot rates is limited.
Dutch liner analyst Dynamar’s senior shipping consultant, Dirk Visser, is also impressed by the discipline shown by the carriers.
“I look at what they are doing at the moment with some admiration, because they struggled to do this even when conferences were allowed,” he says.
Researcher Transport Trackers believes the immediate post-Chinese new year period is key to understanding how much tonnage carriers will re-introduce.
“Effective capacity reductions through slow-steaming and lay-ups is working on increasing effective specific trade utilisations to the point where some may add capacity,” it says. “No one knows how strong markets will be in Q2 and Q3 in 2010, but if strength resumes post-new year, then lines will consider adding back capacity. Then rate haggling will start over again.
“The liner industry is enjoying strong rate action now, but nothing is clear for the remainder of the year, except that it is not likely to be as poor as last year.”
Visser agrees: “Lines kept rates high until the Chinese new year, but if volumes stay reasonably high, how long can they resist the temptation to put in additional ships? Whoever does will be followed.”
However, Transport Trackers says that one thing that may stop carriers trying to grab market share is that last year’s rate war failed to have too much of an effect on competitors.
“Why cut rates if you think you are going to pressure the competitor?” it asks. “They’ll simply run to their government to get a bail-out or guarantee.”
But it appears carriers are already starting to move on re-introducing capacity.
One leading China-based forwarder said some lines were already sounding-out customers about the introduction of more capacity. And AXS Alphaliner says the percentage of the global fleet that is laid up slipped below 10% in February.
This month, Wan Hai Lines and Pil will launch a weekly Asia-Europe service, using nine 4,250teu ships, while CSAV Norasia starts a ten 5,000teu-vessel service between China and the western Mediterranean. There are also rumours that the CKYH Alliance of Coscon, K Line, Yang Ming and Hanjin, plus another unnamed major carrier, also have plans for new services.
But Visser says this does not necessarily mean rates will decline.
He says: “Late last year, some carriers had already offered extra loaders – ships added to services for one rotation to pick up cargo that couldn’t be loaded – and if volumes keep up, the additional operations should not represent too much of a problem for the rate levels if they, in fact, replace those loaders.”
However, he said the impact of new entrant to the trade, the Containership Company (TCC) was unknown.
It is understood TCC will introduce an Asia-Europe service using vessels of around 5,000teu.
“TCC is a bit of a wild card, as it may have to fight to get itself into the market via the price instrument,” says Visser.
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