News / Long-term lay-ups could be the only answer to grim Asia-Europe trade

02/05/2013

As Hong Kong-based container shipping line OOCL celebrated the launch of its latest 13,200teu container ship at the Geoje shipyard in South Korea, the prospects for the Asia-Europe trade, the lane on which it will operate, could hardly be more grim.

Christened the NYK Hercules and to be chartered by OOCL’s G6 alliance partner NYK, the addition of yet another ultra-large container vessel (ULCV – we have to opt for some sort of abbreviation, this one seems as good as any, given that the definition of “post-Panamax” is due to undergo revision once Panama completes its canal expansion project) will not help the already highly skewed demand-supply relationship on what still remains the world’s largest box trade lane.

The vessel will enter service on the G6’s Loop 4, as part of a fleet upgrade that has also seen Hapag-Lloyd’s series of 13,200teu ships, which began with the delivery of the Hamburg Express last year, and is deployed on the same service.

At the same time however, the rate situation on the trade is back to the loss-making levels last witnessed during the ruinous rate war that reached its nadir in 2011, and it appears there can be little carriers are either willing or able to do about it while demand remains so stubbornly weak.

The recent drops have been almost unprecedented in their severity. In mid-March, most indices put the level at around $1,150-1,200 per teu on the Shanghai-Rotterdam leg. By the end of last week the Shanghai Containerised Freight Index had dropped to $818 per teu, with reports that some carriers were going as low as $700 per teu – and that is with the Bunker Adjustment Factor (BAF) included.

By way of a benchmark of just how serious the situation now is, Maersk’s latest BAF, published on Tuesday for Asia-Europe, was $865 per teu, meaning a carrier would have to charge between 5-23% above the market rate (depending on what rates other carriers are quoting – 5% if they are at the SCFI level) on a trade in which there is considerable overcapacity, just to cover its fuel costs.

It seems almost perverse that the major carriers are not doing more to combat this, but what options do they have in the face of such slack demand and given the fact that according to the orderbook, there will be another 30 ULCVs delivered this year, including the first five of Maersk’s 18,000teu Triple-E class?

A report from Alphaliner suggested that the recent propensity for skipping sailings had had very little effect on rates’ downward descent, as load factors had continued to remain at about 80%. Drewry’s Neil Dekker told The Loadstar that the expected withdrawal of the Evergreen/China Shipping/Zim CES2 service in June “will be a help, but something more radical will ultimately have to be done”.

He noted how load factors were temporarily buoyed by 4-5% in the week of a skipped sailing, “but then in the second, third and fourth week after that there is the heavy erosion of rates again”.

“This suggests that it is not just load factors which are contributing to the downward pressure, but that some carriers are being particularly aggressive in their pricing and chasing market share to fill the ships coming to the trade,” he said.

He also added that since the formation of the larger alliances such as the G6, and the introduction of larger vessel sizes, services on the trade had become more inflexible, meaning that it is more difficult than ever to pull an entire string because of increased complexity.

And with continuing deliveries increasing the overall capacity on the trade, the fact is that pulling a string of smaller vessels can make even less of an impact on rate levels. Ultimately, long-term lay-ups appear the only way for the trade to get itself back into some kind of balance, unless there is a sudden turnaround in demand – something that few in Europe expect.

And, in fact, Drewry has begun to warn shippers that severe capacity shortages could be around the corner. In its latest Logistics Executive Briefing it wrote: “Unless demand picks up significantly, carriers will need to take more drastic action in order to restore rates to profitable levels. Cargo owners should beware a capacity correction to come which will mean tighter space and for a while at least, higher rates.”