News / Shippers warned to be 'vigilant' as capacity cuts look inevitable

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Carriers’ attempts to force up rates on the moribund Asia-Europe westbound trade are almost certain to fail unless there is renewed push to reduce the overcapacity situation.

This week Hapag-Lloyd, just as it did a year ago when it led the container shipping pack in introducing a huge general rate increase (GRI) to force rates up, announced a raft of ambitious peak season surcharges (PSS – although quite what the difference between a peak season surcharge and a general rate increase is, given the relative absence of any sort of “peak” over the last couple of years, seems to be beyond the bounds of The Loadstar’s cognitive and semantic elasticity): $650 per teu from Asia to the Med on 10 June; $1,000 per teu from Asia to North Europe and the Med on 1 July; and another $500 per teu between 1 August and 30 September on Asia to North Europe shipments.

The following day Maersk announced a $750 per teu GRI from Asia to North Europe to come into force on 1 July. However, in contrast to last year, when carriers’ published tariff hikes seemed remarkably uniform, this year there is a full menu of different price ranges: Cosco plans to introduce a $300 per teu PSS to both North Europe and Med ports on 1 June; China Shipping is seeking a $500 per teu PSS on the same legs; and Evergreen has announced a $650 per teu GRI on Asia to the Med beginning 3 June.

Part of the reason behind the huge divergence in levels may be the fact that few in the carrier community really have that much confidence that the rate increases will stick in any meaningful sense.

The well-documented problem is that of capacity. While demand on Asia-Europe as well as the Transpacific remains muted, there seems little realistic chance that any of these increases are sustainable, especially given that global shipping capacity is continuing to rise.

Philip Damas, director at Drewry Maritime Research, said: “Any rise in pricing will prove short-lived. There may be a temporary increase, and certainly not $1,000, but carriers need to remove two weekly services to rebalance the capacity with demand before rates increase.

“We think there will be a similar situation to early 2o12, when the carriers were losing so much cash that there was a strong inducement to suspend loops rather than continue operating. It’s basic economics.”

In a webinar launching its Online Container Freight Rate Insight Database, the supply chain consultancy reiterated its forecast that rising slot supply will once again outstrip demand, predicting that 2013 will witness yet another year of excessive supply growth, with the container shipping market seeing another 1.6m teu of new ship deliveries worldwide – equating to a net increase of 7.5% – while demand is forecasted to growth 4.5%.

“As a result we expect freight rates to remain highly volatile as market fundamentals remain weak,” said freight rate benchmarking manager Martin Dixon, adding that across the year as a whole, average freight rates are expected to remain “flat”.

“Contract shippers moving cargo westbound on the Asia-Europe and eastbound on the Transpacific should expect to pay similar rates to last year, and the degree of change will depend on the timing of the negotiations and will be tempered by a fragile spot market as carriers remain constrained by overcapacity.

“Drewry advises shippers to maintain vigilance given the ongoing instability and volatility. After several years of financial losses, carriers may well be forced to withhold capacity to force rates up to profitable levels, and having the wrong carrier or contract choice could result in service disruption, severe freight rate increases or unilateral contract terminations,” he said.

The company reiterated its warnings that at some point this year shippers should expect a severe contraction in capacity from carriers with no other option.

“The current overcapacity is caused by individual carrier attempts to reduce their costs per ship, and this makes perfect business sense for each shipping line, but the collective impact is to boost overall capacity at a time of weak demand,” Mr Damas said.