As ocean shippers and carriers prepare for the New Year, the foremost issue on their minds is whether carriers will be able to sustain the rate increases they need to rebuild their balance sheets, but the early signs are not encouraging.
“What does 2013 look like? The word is volatility,” said Lars Jensen, chief executive of SeaIntel Maritime Analysis, the Copenhagen-based consultancy. “If you look at next year on average, you’re going to see a year that looks pretty much like this year. It’s going to be characterized by a lot of enjoyment for the carriers when rates go up, and sheer terror when they come down in the very frequent cycles.”
The cycle of rates in 2012 was compressed to less than a year from trough to trough in the market. “I would not be surprised if it were not even more rapid next year. You might wind up seeing almost two full business cycles in the same year,” Jensen said.
After a bad start to 2012 in the Asia-Europe trade, where carriers engaged in a rate war, they withdrew enough vessel capacity to support an unprecedented number of general rate increases that eventually brought profitability. But by year-end spot rates were heading in only one direction — down — in both the Asia-Europe and the trans-Pacific trades. How bad was it on all global trade routes? By the beginning of Dec. 6, the Drewry/Cleartrade composite World Container Index for all global trades had declined by 66 percent to $1,706 per 40-foot container from its July 5 peak for the year of $2,590.
Carriers were able to jack up rates in the second quarter of 2012 by combining services, slow-steaming and withdrawing some vessel capacity, but that didn’t last long, and the same pattern looks likely to persist in 2013. “Once the rates reach reasonable levels, the carriers look at the portfolio of ships they are not using and will reactivate tonnage. That will send rates down equally fast,” Jensen said.
That’s what happened in 2012. Carriers had idled 5.8 percent of the existing fleet, or 302 vessels with a capacity of 913,346 20-foot-equivlanet units by early March. But just three months later, after rates had firmed up in early June, the idle fleet dropped to 2.7 percent of the fleet, or 207 ships with 432,397 TEUs of capacity.
An early test of carrier resolve will come this month when the carrier members of the Transpacific Stabilization Agreement plan to implement the TSA’s recommended rate increase of $400 per 40-foot-equivalent container unit to the U.S. West Coast, and $600 per FEU to all other destinations. Since mid-October Drewry’s trans-Pacific rate benchmark for shipments from Hong Kong to Los Angeles had fallen by 20 percent as of Dec. 5 to $2,711 per FEU. Then a second test of carrier rate hikes will come in January when most liner companies plan to implement a GRI of up to $600 per TEU in the Asia-Europe trade.
The problem carriers face is the glut of vessel capacity hanging over the market. The overhang promises to get even worse next year, when the global container fleet is expected to increase 9.8 percent, following the 7.2 percent increase in 2012, according to Alphaliner. But global demand for vessel space is estimated to grow by only 4 percent to 6 percent in 2013, and is likely to fall again in the critical Asia-Europe trade, where it dropped 4.6 percent in 2012 because of the European recession.
“They are going to have to pull more capacity in order to get rate up to a sustainable level,” Jensen said. “Depending on how quickly carriers want to move, we might even see rates rebound on the trans-Pacific and Asia-Europe lanes in the lead up to Chinese New Year on Feb. 10, but I have no illusions that they will keep that tonnage idle when rates become good.”