News / Container shipping rates could plunge after Asia-Latin America capacity hike

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Container lines on the Asia-west coast South America tradelane are preparing for a fight for market share, as capacity is set to spike by 18%, year on year.

According to Alphaliner’s analysis of the Asia-Latin America route, following the restructuring of services caused by Maersk Line’s acquisition of Hamburg Süd, from April weekly capacity will reach some 84,000 teu, compared with 71,000 teu a year ago.

The reorganisation of Hamburg Süd’s services and the termination of its vessel-sharing agreements on the tradelane was part of the requirement imposed on Maersk by Chinese and Korean regulators in green-lighting the deal.

One of the other tough conditions imposed by China’s Ministry of Commerce was that Maersk and Hamburg Süd’s combined reefer slot capacity between Asia and Latin America must be reduced from a 45-50% market share to 34-39% within 90 days of closing the deal. Alphaliner notes that Maersk has already acted to reduce the number of reefer plugs on vessels deployed on the tradelane.

Meanwhile, competitors are seeing the takeover as an opportunity to grab market share from Maersk and Hamburg Süd as the carriers begin an unsettling transition period of merging operations and assets.

Historically, ocean carrier M&A has resulted in a loss of business, and in order to retain customers being approached by opportunist rivals, freight rates are often discounted.

During Maersk Group’s Q4 2017 earnings call last month, chief executive Soren Skou acknowledged that he expected the combined businesses to perform “slightly below” market growth this year.

“We do expect some retention loss or some cargo loss as we add the two companies together,” he said.

According to the Alphaliner data, from April, 105 containerships with a combined nominal capacity of 893,000 teu will be deployed on 10 rejigged services between Asia and the west coast South America. This compares with the current nine-loop offering by 95 vessels with a capacity of 775,800 teu.

With more slots to sell, carriers will need to be aggressive in their pricing in order to capture business. They will also need to be prepared to waive GRIs and bunker surcharges to retain existing business.

It seems certain, therefore, that freight rates will come under downward pressure, at least until the new services bed in.

Last week saw the Santos component of the Shanghai Containerized Freight Index (SCFI) shed just over 9% to $2,309 per teu, but this was in keeping with most of the other routes covered by the index where rates softened on weak demand following the Chinese new year.

By January last year rates on the route had made a spectacular recovery, to about $3,100 per teu from the severely loss-making lows of below $100 per teu seen on the trade in 2015. This was achieved by a radical 40% cull of services in 2016, as carriers bailed out of the trade.

But now, with supply once again tipping the scales over demand, carriers will hope that rates do not fall to sub-economic levels.