Coming up for air

Coming up for air Transatlantic lines suck up volume declines, delaying capacity reductions.
But how long can they hold their breath?

By Chris Dupin

      When Andy Abbott, president and chief executive officer of Atlantic Container Line, was asked about conditions in the transatlantic liner trade, he offered a summertime analogy:
      'It reminds me of when I was 10 years old with all my friends out in the local swimming hole, and we were playing how long can you hold your breath underwater,' he said. 'Everybody is doing that right now and hoping for something else to happen. Unfortunately people are going to have to take a deep breath soon.'
      Eventually, when one of the carriers comes up for air, Abbott expects it will manifest itself in a further reduction in transatlantic capacity.
      'I think you will probably see some of that,' he said. 'If everybody is running at 65-70 percent, it does not make sense to run all these ships that are two-thirds or three-quarters full. It makes sense to do further rationalization and I think that is what will happen as the summer progresses.'

Abbott

   Westbound transatlantic volumes fell 17 percent in the first quarter and 21 percent in April when compared to like periods in 2008, according to the European Liner Affairs Association. Eastbound volumes were off 29 percent in the first quarter, 28 percent in April.
      Soren Castbak, senior director of transatlantic product for Maersk Line, believes the ELAA numbers may underestimate the downturn, saying figures from the Port Import Export Reporting Service (PIERS) show westbound trade is down about 25 percent; eastbound 30 percent. He said Maersk figures are similar, with the company maintaining its market share in both directions.
      Rates have also dropped. The ELAA's price index, which was set last year at 100, fell steadily through the first quarter to hit 84 in March in the eastbound direction and 76 westbound.
      (ELAA said it represents the interests of 90 percent of carrier capacity in the trade. It changed its focus when the European Union's ban on ocean carrier conferences involving European ports became effective in October 2008, and the association became largely an information gathering and disseminating body, rather than lobbying on behalf of carriers. ACL is not a member of the ELAA while, MOL left last November and 'K' Line announced in late June that it would leave.)
      Hapag-Lloyd said it moved 274,000 TEUs in the first quarter of 2009, 19.2 percent less than it did in the same 2008 period, and that first quarter rates in the trade were 6.7 percent below the average rates in the same 2008 period.
      On July 13, the German carrier announced plans to increasae transatlantic rates, saying the industry was 'facing unprecedented low freight levels which are no longer sustainable.' The planned increase between North Europe and the Med and U.S. and Canada will be $400 per 20-foot container and $500 per 40-foot container in both directions. Rates to Mexico will rise by the same amount westbound, but only $150 for 20-footers and $300 for 40-foot boxes eastbound. Rates will increase Sept. 1 or Oct. 1, depending on contract validity dates. The hikes come on top of an emergency bunker surcharge going into effect Aug. 1.
      'The market has not improved and I am taking the position that it is not going to improve for the foreseeable future,' Abbott said. 'We are gearing ourselves around that and preparing for a longer term market decline. I think unless you do that you are going to be in really deep trouble down the road. The fourth quarter of this year, I think, is going to be disastrous.
      'We are a smaller company and are more a niche operator and probably haven't been hit as badly as the other guys. We still have black numbers,' he added.
      Drewry Shipping Consultants in London is also forecasting grim conditions on the transatlantic for the rest of 2009.

Dekker

      Neil Dekker, editor of Drewry's Container Forecaster, said he did not expect to see 'improvement in the overall mechanics of the trade. We don't see consumers buying significantly more. There are a lot of people talking about green shoots or whatever, but we have not seen anything.'
      The Container Forecaster's second quarter edition projects 2009 westbound transatlantic trade to North Europe will be about 1.96 million TEUs, down about 11.9 percent from 2008, while eastbound volumes will be 1.77 million TEUs, down about 19 percent. That's not quite as severe as the 17.7 percent westbound and 25.4 percent eastbound declines that Drewry reported for the trades in the first quarter.
      In the U.S./Mediterranean Drewry projects westbound volume of about 880,000 TEUs for the year, down about 14.7 percent, and eastbound volume of about 655,000 TEUs, down 20.2 percent. That compares to first quarter declines of 17 percent westbound and 24.5 percent eastbound.
      Dekker said unlike the Asia/North Europe or Asia/Med lanes, where there have been many strings pulled or other adjustments to capacity, little has been done in the transatlantic to reduce capacity. Some carriers have only one or few routes on the transatlantic, he noted. For them, eliminating a string would be tantamount to withdrawing from the trade or slashing frequency by a large percentage.
      While further adjustments may be coming, several carriers modified their transatlantic services in the first half of the year:
      ' Hapag-Lloyd and OOCL in March temporarily suspended one of their three St. Lawrence Coordinated Services between Montreal and Europe, citing the downturn in the economy.
      ' In April, Hamburg S'd said it would indefinitely suspend plans for a standalone service, and decided instead to participate in the Grand Alliance's Atlantic Express Service. 'Fast declining volume and revenue levels in the transatlantic' could no longer justify adding further tonnage to an already greatly overtonnaged trade, the company said.
      ' In July, Grieg Star Shipping had its subsidiary Atlanticargo cease regular container calls at Charleston, S.C. 'The extraordinary drop in rates as well as volume since the fall of 2008, combined with the dismal prospects for a return to normalcy, has made this decision necessary,' the company said. It added that it would continue the westbound and eastbound scheduled voyages to the U.S. Gulf, where calls in Mobile and Houston are already combined with Grieg Star Shipping's breakbulk operation.
      ' In March, CMA CGM Group and Maersk Line launched an optimized version of the Amerigo Express service linking the Mediterranean and the U.S. East Coast. It replaced a service that previously partnered CMA CGM and Evergreen. Maersk said by combining two strings, about 2,900 TEUs of weekly capacity was removed from the trade, while adding port calls.
      ' Another major change affecting the U.S.-Med trade came in January when Hanjin and United Arab Shipping Co. combined services between the United States and Mediterranean, Middle East and Indian Subcontinent with a string running between the Med and India. The combined string, uses 12 ships instead of 19 for two strings it replaces. Hanjin said the successor service employs larger and faster ships.

Soren Castbak senior director, transatlantic product, Maersk Line
'With this much open space and rate levels which are not sustainable ' the market should be prepared for some service changes over the next 12 months.'

      'If you look at the North Europe to North America part, this is not a lot of capacity adjustment,' Castbak said. 'By far, demand drop outweighs the capacity drop. It for sure is not sustainable when you sail with this much open space and rate levels which are not sustainable. The market should be prepared for some service changes over the next 12 months.'
      Castbak expects overall trade to be off about 20 percent during 2009, compared to 25-30 percent in the first quarter. If that sounds like he thinks things are going to get better, he points out trade had already begun to slide in the fourth quarter of 2008.
      The slowdown in trade has also created operational challenges for carriers, said Castbak, who noted import containers are often bound for consumer-heavy locations that are different from industrial areas where export cargo originates. The problem has been aggravated by the drop in transpacific imports, he said.
      'You have the high cost of shifting equipment from location to location within North America. I think you will see more carriers struggle in accepting this without recovering the cost from customers. So I think you will see carriers start to increase costs of providing boxes where shippers need them,' the Maersk executive predicted.
      A European executive at one carrier said that shipments of many sorts of commodities have slowed because of the recession. The trade has been affected by many companies deciding to extend plant shutdowns, and said some U.S. exports may be hurt by 'buy America' provisions in economic stimulus packages.
      Abbott noted the U.S. economy is 'pretty much geared around automobiles or housing, and anything related to automobile or housing is down.'
      'Nobody is buying cars and that is down much more than 30 percent,' Castbak said. 'The whole automotive industry has probably been hit harder than all other commodities.'
      Trade with Eastern Europe and eastern Mediterranean countries have dropped more sharply than with some western European countries, he said. 'What comes quickly, goes quickly and the Eastern European countries had a boom last year.' Since then, garment and textile production from eastern Mediterranean countries such as Turkey and Romania have plunged, he explained.
      Despite the EU making shipping lines subject to its antitrust laws, sounding an end to ocean carrier conferences calling the continent, including the Trans-Atlantic Conference Agreement, Castak said, 'with or without a conference, we would have exactly the same situation.'
      Imports of products such as cheese, wine, beer and other foodstuffs have been dampened somewhat by the recession, though shipping executives say these have held up better than other commodities.

Hamilton

   Daniel Hamilton, director of the Center for Transatlantic Relations at Johns Hopkins University, suggested there are several factors that distinguish transatlantic economic relationships from others, especially those with companies in Asia. These trends may bode well for the long-term health of the trade.
      'Where our economic relationship with the Pacific is trade-oriented, our economic relationship with the Atlantic is investment oriented,' Hamilton said. 'Usually trade is used as a benchmark for commercial interactions between countries, but that's a very misleading benchmark because it ignores investment.
      'The real trend over the last 20, 30 years has been that investment flows have tightly bound both sides of the Atlantic together so that the economies of the U.S. and Europe are much more intensely tied to each other than any other relationship the U.S. has with any other country or group of countries in the world,' he said.
      'The second is that the value of the dollar has changed a lot in recent years,' he said. Before the current economic crisis, U.S. exports to Europe grew more than 15 percent in 2007 and more than 16 percent in 2006. Twenty-eight U.S. states posted double-digit export growth to Europe in 2007, he said. 'The point is that trade was going well for the U.S. side. Investment flows, which are the real key to the transatlantic relationship, were booming.'
      From the beginning of the decade to mid-2008, he said Europe accounted for 57 percent of total U.S. direct and indirect investment in the world, and six of the top 10 U.S. investment markets have been in Europe, with the Netherlands and the United Kingdom as the top two U.S. investment destinations in the world.
      'The U.S. invests more in the Netherlands for instance than either Canada or Mexico, and the U.K. is by far the single most important market in the world for American companies, if you put investment and trade together. It far outdistances China or anything even similar,' he said.
      'Investment drives the relationship rather than the trade and the trade flows are coming from the investment relationship. Inter-company trades ' say 3M sending parts across the Atlantic to itself or BMW sending parts from Munich to Spartanburg S.C. ' is about two-thirds of the trade across the Atlantic. It's called related company trade. The company is basically selling to itself.
      'It varies from country to country but in Germany, for instance, the largest economy, about two-thirds of its trade with the U.S. now is this investment driven trade. German investment in the U.S. is about five times as much as German exports to the U.S. these days. And those exports that are coming to the U.S. are driven by the German investment that is now here. The Germany companies themselves are driving the demand for German product in the United States,' Hamilton said.