News / Extra capacity will weaken transpacific carrier hands in contract talks

The new alliance set up and the launch of three independent services, combined with a weak start to the year for demand on the headhaul, does not augur well for Asia-US west coast annual contract negotiations, according to consultant Drewry.

It calculates that the new alliance structures, which come into play on Saturday, will increase headhaul capacity by about 4% and by 2% on the backhaul, compared with April 2016.

In addition, Zim launches its pendulum (ZMP) service deploying 14 4,500 teu vessels; HMM three standalone services operated by 6,600 teu ships and newcomer SM Line starts the first of its transpac loops, with 6,500 teu vessels.

And this hike in supply comes against weakening demand, warned Drewry.

Quoting Piers data for the first two months of the year, Drewry said volumes from Asia to the US west coast had shown a decline of 9%, on the same period of 2016, against a 4% increase to the US east coast and an impressive 32% jump to US Gulf ports.

The fall in throughput followed a 4.6% growth from Asia to the US west coast in 2016, compared with the previous year, to 13.2m teu – thereby retaining its status as the world’s busiest deepsea trade.

Drewry added that the fourth quarter had seen a 9.2% year-on-year surge on the route, although the figures were skewed by frustrated September shipments on bankrupt carrier Hanjin Shipping moving later in the year.

Drewry said it expected to see east and Gulf coast ports “taking a greater share from the west coast gateways” as a consequence of the enlarged Panama Canal causing a shift in container supply chains.

The combined effect is “bad timing”, said Drewry, for carriers negotiating new annual contracts running from May.

Indeed, spot container rates on the route have been under pressure in recent weeks, starting the year at a buoyant $2,500 per 40ft. But according to last Friday’s Shanghai Containerized Freight Index (SCFI), the USWC component had sunk by almost 50% to $1,288 per 40ft.

Thus, carriers’ aspirations of achieving an average $1,500 from 1 May – just shy of where they stood in 2015 – were likely to be thwarted, suggested Drewry.

“The consequence…is that BCO prices for the new term would stand little chance of being brought over the $1,000 threshold, at least for the major importers,” said the consultant.

“It is unfortunate timing for carriers that the alliance re-shuffle coincides with weaker demand. The extra capacity and new entrant will add downwards pressure on spot rates and make obtaining higher BCO contracts in an already overcrowded market that much more difficult,” it concluded.

Its comments echoed those from Alphaliner executive consultant Tan Hua Joo at the recent TPM conference in Long Beach, when he suggested capacity on the transpacific would be 4.9% higher in this year’s peak season than in 2016, and would grow 5.4% between now and June, much of it as a result of the independent carriers, which are set to have a combined 18% market share of the trade.

“SM Line is basically the resurrection of Hanjin’s transpacific operation, and I would expect some aggressive pricing from them – even if SM only has a 2% market share, it could still affect the overall pricing on the trade,” he said.

“Independent carriers will continue to be highly dynamic; there is still a significant amount of capacity in their hands and that will affect the spot market, if not also the contract market.”