Riding out the storm

Riding out the storm Intra-Asia volumes, rates have suffered amidst fierce competition. But there's hope it will rebound soon.

By Eric Johnson

      One year ago, American Shipper examined intra-Asia container trade and found it to be a source of potential growth for ocean carriers small and large.
      That feature came out mere days before the economic world caved, and few could have predicted the calamitous container shipping environment that would ensue.
      Instead of serving as a counterbalance to weakening demand in the transpacific and Asia/Europe trades, as had been predicted, intra-Asia got into the vortex too. New ship deliveries forced major carriers to cascade long-haul ships into the shorter intra-Asia loops. That extra capacity strained the supply side, tugging down rates.
      And with exports out of Asia down significantly (by 21.7 percent in China in the first half of 2009) one of the drivers of intra-Asia trade was losing steam. About the only good news is imports in certain Asian markets are rising and that could mean intra-Asia is set for a quicker rebound than other trades.
      The dynamics of intra-Asia container trade make it hard to properly analyze. The trade employs smaller vessels, but more of them, on services with ever-changing rotations. Smaller niche carriers mingle with large regional carriers, who do battle with the truly global international carriers. That last group increasingly wants a piece of the intra-Asia action.
      Both Maersk Line and CMA CGM, the world's largest and third-largest carriers, have staked their claim to intra-Asia trade through their respective subsidiaries, MCC Transport and Cheng Lie Navigation Co.
      At the end of 2008, Maersk said it was transferring all intra-Asia trade to Singapore-based MCC and by June, MCC Chief Executive Tim Wickmann said the goal was to expand the company's 2 percent share of intra-Asia trade closer to Maersk's market share of overall global container trade (15 percent as of August).
      But Wickmann, in an interview with International Freighting Weekly, touched on how the path to growth would be very different from that of Maersk, which enjoys substantial market share on every major lane.
      'There are more than 3,000 corridors, including cabotage, in the intra-Asia market, and we believe that it would be very difficult for one carrier to have substantial coverage in all trade lanes,' he said.
      It's why everyone feels there's a slice of the pie for them, including purely regional carriers like Thailand's RCL and Taiwan's TS Lines. Those two are the world's 22nd- and 28th-largest carriers in terms of capacity, but others like MISC Berhad and Wan Hai have to be considered as well.
      Malaysia's MISC has pulled out of its Far East/Europe responsibilities within the Grand Alliance and is focusing almost solely on intra-Asia activities, as is Taiwan's Wan Hai, which fell out of the top 20 biggest lines this year (see related story). But it has bolstered its bottom line by avoiding competition on the east/west trades and focusing on intra-Asia. An August Lloyd's List report said the line's intra-Asia revenue will rise to 85 percent of total revenue in 2009, from 73 percent in 2008.
      Outside of the interest of Europe's major carriers and regional players, there's also the fact that 15 of the world's 25 biggest carriers are based in the Far East or Southeast Asia. Intra-Asia is, in essence, their backyard.
      In recent months Evergreen has forged intra-Asia partnerships with both mainland China carriers, COSCO and China Shipping. In July APL started a new Korea/Southeast Asia service, one of 17 the carrier offers strictly within the Far East and Southeast Asia.
      The new service represents a first of sorts for APL ' it's first dedicated intra-east Asia service ' and it will use good-sized vessels (four ships of 3,000 to 3,500 TEUs). Of course, APL is not alone.
      OOCL offers 34 such services, including feeders and barges. Yang Ming has 25, PIL has 20, Hyundai has 10, Hanjin nine and NYK eight (through its intra-Asia subsidiary TSK Line). China Shipping has eight domestic Chinese services (not including those offered by its dedicated Pearl River Delta feeder subsidiary Universal Shipping). Cheng Lie, the CMA CGM subsidiary, offers 13 intra-Asia loops.
      In short, there's a veritable swarm of activity throughout intra-Asia. But for much of 2009, rates were at unsustainable levels for ocean carriers.
      First quarter average rates (not feeder rates) between central China and Southeast Asia were $469 per TEU and $848 per 40-foot container, including bunker surcharges and terminal handling charges at origin and destination, according to Neil Dekker, editor of Drewry Shipping Consultants' Container Forecaster. Drewry issued a landmark report on the intra-Asia container trade in June 2008.
      'This represents year-on-year declines of 27.1 percent and 27.5 percent, respectively,' he told American Shipper. 'Intra-Asian freight rates have traditionally been low, but stable. However, since (the first quarter of 2009) we are seeing a fair decline in average intra-Asian rates due to lower volumes, overcapacity and increased competition from global players.'
      According to a Lloyd's List report in late July, rates have begun to pick up to the point where they are at least breakeven, after months in which they were not.
      'There's so much idle capacity that any improvement in freight rates is immediately followed by the deployment of more ships,' Dhrubajyoti Das, executive director of Singapore-based Samudera Shipping Line, told IFW in July.
      However, the rise in demand is likely only temporary, coinciding with a slight uptick in demand for Asian exports to Europe and North America ahead of the Christmas season.
      Intra-Asia trade is still dependent on the regional movement of unfinished goods destined for Europe and North America. However, as China struggled with declining exports, its imports have taken up a larger proportion of two-way trade. As China's economy benefits from a massive government stimulus package, that gravitational pull will only get stronger.
      'While it is difficult to differentiate between products sold to China for export-processing purposes and those for China's own consumption, China's customs data indicates that about half of its imports are for domestic uses,' the Hong Kong Trade Development Council said in a report on intra-Asia trade.
      'This is especially the case for raw materials and machinery imports such as fuel from Indonesia and Singapore, timber from Malaysia and Indonesia, iron ore from Australia, and machinery from Japan, Korea and Taiwan. As a result, China has been the highest growth market for most Asian exporters over the past decade, with its share in total exports of these economies more than doubled.'
   But volume at mainland Chinese ports was down 11 percent in the first half of 2008, including a 15.6 percent drop at Shanghai and a 21.1 percent drop at Shenzhen. It fell 18.2 percent at Singapore, 17.6 percent at Hong Kong and 17.8 percent at Busan.
      There's no mistaking that the global container hex was felt even in the somewhat insular confines of intra-Asia. And that carriers operating in the region are feeling the same pressures, if not more, than those in the major east/west trades.
      'Global operators continue to cascade Panamax tonnage into intra-Asian trades and they are focusing on using their own tonnage in intra-Asian services rather than reliance on smaller regional players,' Dekker said. 'Intra-Asian players that were becoming more global have all now retreated back to their roots and concentrated on intra-Asia. They could not compete in terms of slot costs with the big players. PIL, Wan Hai and CNC (the CMA CGM affiliate) have all withdrawn their presence in certain east-west trades.'
      Dekker said the increasing focus of the global carriers on intra-Asia trade ' whether through use of their own vessels or through dedicated subsidiaries ' will stress smaller carriers.
      'We do believe the regional carriers will be under severe pressure this year as they will continue to have increased pressure and competition from the global operators, especially as Maersk declared its intention that it wants to increase its share in the market. There is every possibility that some may disappear,' he said.
      Another factor adding inherent capacity to the trade is that major lines are increasingly using transpacific and Far East/Europe services as de facto intra-Asia routes. In other words, if an 8,000-TEU ship can't be filled with goods from Asia destined for Europe, intra-Asia containers can take up some of that excess space. Carriers have been adding calls on major services, hoping to offset losses in transit time with increased opportunities to sweep up cargo.
      In any case, long-term prospects still look good, perhaps better than the main east/west trades. In its 2008 report Drewry forecast volume would hit more than 50 million TEUs in 2013, up from about 30 million TEUs in 2008. And that's only taking into account trade between the Far East and Southeast Asia.
      Looking more expansively at intra-Asia to include the Middle East, the Indian Subcontinent and even Australia, trade looks set to blossom still, when the current downturn lifts.
      UPS's Asia Business Monitor surveyed small business in the region, broken down by country, and found that one-third to half thought economic recovery would come in 2010. And few saw the downturn stretching past 2011.