Commentary: It only takes one

Is CMA CGM’s decision to lower Asia-Europe freight rates the first domino to fall in a new race to the bottom?    Last week, French container carrier CMA CGM made the surprising move to drop its FAK (freight all kinds) pricing between Asia and North Europe.
   Effective Sept. 24, CMA CGM is lowering its FAK rates from $1,100 per TEU and $2,000 per FEU to $1,000 and $1,800, respectively. For a 40-foot high-cube and 40-foot reefer, the carrier is reducing the price from $2,050 to $1,850.
   Rate fluctuations are common in container shipping, but the timing of CMA CGM’s move is curious to say the least.
   Carriers had a rough go of it in the first half of the year, with several of the top firms reporting losses due to slowing demand growth, higher bunker fuel costs and increases in capacity, which was already oversupplied to begin with, but were finally seeing some rate relief in the past month or so after reducing capacity in the Asia-Europe and transpacific trades and a somewhat unexpected early peak season spurred in part by the looming threat of additional U.S. import tariffs on Chinese-made goods.
   The rate reduction also came as CMA CGM itself reported a less-than-stellar financial result for the second quarter, with profits plummeting nearly 90 percent to just $22.7 million compared with the same three-month period a year ago, despite revenues rising 7 percent to $5.7 billion and total transport volumes climbing 9.6 percent to 5.19 million TEUs.
   As of last week, Drewry’s World Container Index, one of the primary indices measuring spot market pricing for container freight, was up 24 percent compared with the same 2017 period. At $1,713 per FEU, rates from Shanghai to Rotterdam were down 5 percent from the previous week, but still 7 percent higher on a year-over-year basis, according to Drewry.
   According to Patrik Berglund, CEO of ocean freight rate benchmarking and market intelligence platform Xeneta, which tracks contract rates, early September marked the first time since February that Asia-Europe rates surpassed those recorded at the same time last year and the first time in 2018 rates have “meaningfully broken through.”
   After lagging behind 2017 levels for the past six months, contracted rates between Asia and North Europe are now up 4.7 percent year-over-year, “thanks largely to a drop off in rates seen during this time last year,” Berglund wrote in a recent analysis.
   “However, with CMA CGM recently publishing FAK rates of $1,800 per FEU effective September 24, perhaps signaling its intentions to get ahead of rate declines or simply to undercut the market, rates will likely follow last year’s trend,” he added.
   To be clear, CMA CGM lowering its FAK rates on a single trade isn’t necessarily indicative of a problem in and of itself.
   The problem is that if history is any indication, it only takes one carrier moving to undercut rates to spark a race to the bottom in the container shipping industry.
   This is not to say that carriers will automatically and immediately revert to ruthlessly competing for market share by continually offering lower rates, only that it is a possibility given a prior propensity for self-destructive behavior.
   Hopefully, for their own sake, carriers have learned their lesson when it comes to such behavior after a disastrous 2016 that saw rates fall so far below operating expenses that the industry lost a combined $3.5 billion.
   After all, what good is it to gain an extra 1 percent of an unprofitable market?
   Further, I would argue that market share gains based solely on price competition are not sustainable because a customer that chooses a service based on rate alone is that much more likely to take its business elsewhere as soon as it finds a better price.
   The question now is whether CMA CGM’s decision is an anomaly or the start of another potentially disastrous rate war.