Global shipping lines grapple with plunging rates, overcapacity and faltering recovery

by Canadian Shipper

Towards the end of an eventful 2011, global shipping lines were doing their utmost to adjust to spreading economic malaise, especially in eurozone countries reeling under a sovereign debt crisis and in a United States still buckling under a real estate meltdown. Amidst weak freight rates, overcapacity and mounting carrier losses, some industry analysts were predicting more consolidation in coming years.

The Canadian economy, for its part, is performing relatively well, although GDP growth forecasts for 2011 and 2012 have recently been revised downwards by various analysts to just above 2%.

Within such a volatile environment, world maritime trade will, nevertheless, again outpace average global GDP upward performance – thanks in large part to emerging countries led by a China still maintaining growth in the high single digits despite some slowdown. Demand, for example, from Chinese steel factories is continuing to fuel ocean exports of Canadian iron ore.

 Otherwise, suggests Chris Gillespie, President of Gillespie-Munro Inc., a leading freight forwarder, there is not much to cheer about.

“An interesting and challenging year lies ahead in 2012, and we may have to prepare for the worst,” he said in an interview.

 “Our own economy,” he said, “is dependent on the rest of the world because of the dominance of resources. We have seen a decline in our clients’ (importers and exporters) volumes, and I don’t see much improvement on the horizon.”

What about the benefits of the Green Shipping trend, enhanced by slow-steaming by carriers?

Here, Gillespie offers this candid view: “Reducing the carbon footprint is highly desirable, but at what price? Ultimately, for many shippers, it’s the dollar that drives decisions. If the price is not competitive, the green dimension is of secondary importance.”

Looking back at highlights of 2011, it’s a question of noblesse oblige to single out Denmark’s Maersk Line, the world’s biggest shipping line.

In June, Maersk drew international attention by unveiling what was called The New Normal manifesto. In essence, it ascertained that, with statistics showing only 56% of containers delivered on time globally, improving reliability would reduce supply chain costs and could become more crucial than low rates. “Reliability is the new rate war!” exclaimed a senior Maersk executive at maritime conference in Montreal earlier this fall.

In its manifesto, Maersk wrote: “Customers, of course, care about cost, but what they really care about is total cost and not the price of a single box. They can accept rate rises; what they cannot accept is a delivery promise that isn’t trustworthy. If customers increase their trust in the shipping industry as a supplier, than we would get more repeat business – the most reliable operators in any logistics sector will always attract customers.”

Putting such thoughts into action, the Danish carrier followed this up by launching its so-called Daily Maersk service in late October on schedules between northern Europe and Asia. Daily cut-off and built-in safety margins ensure virtually total reliability in transit times between Asia and Europe. Maersk’s hope is that Daily Maersk will become part of shipper daily production schedules.

In the real world, can one book ocean cargo shipments like booking a flight or train voyage? Observers consider the concept can apply more easily on Pacific routes which are generally more tranquil than the North Atlantic, where seas can be very violent between November and February. Not surprisingly, Daily Maersk is not being applied to the North Atlantic, at least not initially.

One should also recall that in February 2011, Maersk stunned the international maritime industry by announcing a multi-billion dollar order from a Korean yard for 10 Triple E vessels offering a capacity of 18,000 TEUs. In late June, the carrier followed this up by exercising its option for 10 additional mega-vessels. Each ship will cost US$190 million. Until then, the 15,000-TEU Emma Maersk was the largest containership on the high seas.

Under a decade ago, a 6,000-TEU vessel was referred to as a mega-ship.

These behemoths, longer than a football field, and slated for delivery starting in 2013, will generate 50% less carbon dioxide than the industry average and will consume about one third less fuel per container than the 13,000-TEU vessels currently being delivered to other carriers.

The huge investments by Maersk are based on the calculation that demand on the Asia-Europe trade will increase 5-8% annually in the 2011-2015 period.

This prompted London-based consultancy Drewry Maritime Research to raise a red flag over the ordering by various shipping lines of more than two million TEU of additional capacity within a year, mainly in the 8,000-plus TEU category.

Drewry warned  that the industry was “running the risk of repeating the mistakes of the ordering frenzy of 2007/2008” amidst a sharp decline in freight rates and average load factors of barely 80% on the Asia-Europe routes.

Moreover, Drewry questioned some of the reasoning behind the bold Maersk newbuilding strategy.

“Maersk has highlighted that there needs to be a revolutionary way of thinking within the industry, but focusing on schedule reliability and environmental factors is not enough – carriers need to properly address the fundamental aspects of supply and demand,” Drewry opined.

Meanwhile, some sobering thoughts on trends in the critical Asia-Europe trades have been advanced by Alphaliner.

According to the Paris-based container market analyst, box freight rates on the Far East-Europe spot market have plunged below zero after stripping out bunker surcharges. Worse, the rates will continue dropping as the big carriers engage in a “destructive” rate war.

The spot rate has, in fact, declined to less than US$680 per TEU (20-ft equivalent unit) whereas the average bunker adjustment factor (BAF) stood at $750 per TEU.

As a result, Alphaliner affirmed, the net rates are lower than during the darkest period of the 2009 container shipping slump. Also in late October, the Shanghai Containerized freight index listed the spot rate from Shanghai to Europe down to $677 – representing a 20% decline since the end of August.

 This means, asserts Alphaliner, that the net spot rate has fallen nearly 70% since March 2010 to an “unprecedented” negative $70 per TEU.

It points out that “these negative freight rates are illusory as current BAF levels fail to incorporate cost savings from extra-slow steaming and from the impact which the introduction of larger ships had on actual per-container fuel costs.”

In another report, Alphaliner estimated that idle containership tonnage will climb above 500,000 TEUs by the end of December versus 360,000 TEUs in December 2010.tonnage

 In related developments, some trans-Pacific carriers have been skipping port calls and holding back vessel departures when bookings are weak – a sign of how the peak shipping season failed to live up to expectations and of how aggressive shipping lines are expected to get in the coming months to cope with overcapacity.

 As evidence of the weak peak season, Orient Overseas (International) Lines posted a year-on-year, 6.6% increase in global volumes in Q3 2011 but this was accompanied by a 8.3% decline in revenue. OOIL officials have described the Asia-Europe trade as “essentially a market share chase” determined by the actions of the Big Three: Maersk Line, MSC and CMA CGM. The refusal to withdraw capacity is further depressing rates, OOIL executives charge.

Nevertheless, capacity and freight rate issues in shipping services to and from Canada, across both the Atlantic and Pacific, do not app
ear to have experienced anywhere near the same turmoil seen in the Asia-Europe trades. This, in part, can be attributed to the relatively small volume compared with the Asia-Europe trades. Among the top Canadian container ports, only Halifax  – widely regarded as a “discretionary port” – recently lost a few customers due to service adjustments in port rotation by carriers to reduce their calls and costs on North America’s East Coast. On the other hand, Port Metro Vancouver and Montreal have been posting solid gains in container cargo.

“With  business down, problems like container shortages aren’t happening,” indcated Bob Armstrong, President of Supply Chain & Logistics Canada.

“There is some concern by shippers over capacity on some routes, but not nearly as much as a year ago,” said Bob Ballantyne, President of the Canadian Industrial Transportation Association.

Commenting on global shipping and trade trends, Michael Broad, President of the Shipping Federation of Canada, noted that the World Trade Organization recently revised its 2011 trade growth forecast downward from 6.5% to 5.8%. “The Euro-zone sovereign debt crisis was cited as one of the drivers for the lower forecast, and until this issue is resolved, it is difficult to guess what direction world trade will take in 2012.”

According to Broad, “the federal government’s pursuit of increased free trade agreements with several countries, along with the Gateway and Trade Corridor strategies will likely boost Canada’s foreign trade and attract more North American cargo through Canadian ports.”

Ruth Sol, President of the Vancouver-based Western Transportation Advisory Council (Westac), offered an upbeat view.

“Canada is well-positioned for the future,” she stated. “The capacity of the railways, ports and terminals will be there to meet the demand forecasted by our resource exporters. And we are seeing commitment to have sufficient redundancy even in the face of disruptions such as the past year’s heavy flooding and unusually difficult winter in Western Canada.”

While monitoring global shipping and freight rate trends is part of the mandate of I.E.Canada, the Canadian Association of Importers and Exporters, its members are above all keen to be kept up to date on regulatory requirements impacting on foreign trade. And very much a hot issue that surfaced in recent months was the Obama Administration’s new Buy America provisions which contain no exemption for Canada.

Joy Nott, President of IE Canada, does not hide her disappointment.. “We went through all this in 2010, and it seems totally contradictory with such historically close Canada-US bilateral relations – as exemplified by last February’s joint declaration, Beyond the Border: a Shared Vision for Perimeter Security and Economic Competitiveness.”

Nott was not convinced by the recent assurance of the US Ambassador to Canada that Canadian industry would still benefit from any uptick of the US economy. ”This is glossing over a very obvious fact,” she stressed. “We have a truly integrated economy and supply chain with the US, and not just a complementary relationship.”

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