• ITVI.USA
    15,909.400
    -330.930
    -2%
  • OTLT.USA
    2.776
    0.014
    0.5%
  • OTRI.USA
    21.610
    -0.170
    -0.8%
  • OTVI.USA
    15,915.300
    -318.010
    -2%
  • TSTOPVRPM.ATLPHL
    3.520
    0.380
    12.1%
  • TSTOPVRPM.CHIATL
    2.960
    -0.660
    -18.2%
  • TSTOPVRPM.DALLAX
    1.610
    0.250
    18.4%
  • TSTOPVRPM.LAXDAL
    3.340
    -0.130
    -3.7%
  • TSTOPVRPM.PHLCHI
    2.100
    -0.250
    -10.6%
  • TSTOPVRPM.LAXSEA
    3.860
    -0.220
    -5.4%
  • WAIT.USA
    126.000
    -2.000
    -1.6%
  • ITVI.USA
    15,909.400
    -330.930
    -2%
  • OTLT.USA
    2.776
    0.014
    0.5%
  • OTRI.USA
    21.610
    -0.170
    -0.8%
  • OTVI.USA
    15,915.300
    -318.010
    -2%
  • TSTOPVRPM.ATLPHL
    3.520
    0.380
    12.1%
  • TSTOPVRPM.CHIATL
    2.960
    -0.660
    -18.2%
  • TSTOPVRPM.DALLAX
    1.610
    0.250
    18.4%
  • TSTOPVRPM.LAXDAL
    3.340
    -0.130
    -3.7%
  • TSTOPVRPM.PHLCHI
    2.100
    -0.250
    -10.6%
  • TSTOPVRPM.LAXSEA
    3.860
    -0.220
    -5.4%
  • WAIT.USA
    126.000
    -2.000
    -1.6%
American ShipperIntermodal

Rate of decline

Rate of decline

When transpacific shippers, carriers rumble on 2010 contract negotiations, something has to give.



By Eric Johnson


      In what can only be considered a make-or-break year for liner carriers on the transpacific, there are two giant, competing forces: the pressure of those carriers to drive up revenue to what they consider a sustainable level, and the resistance of shippers to those measures.

      Quite simply, one will have to give way to the other.

      Throughout the latter half of 2009, as carriers picked up the pieces of an astonishingly bad three quarters, there has been a steady drumbeat of rate hikes by carriers, alliances and discussion agreements globally. All have carried the same message: rates need to rise if carriers are to survive.

      On the transpacific, those messages have been filtered through the cipher that represents all but one of the 16 biggest liner carriers in the trade, the Transpacific Stabilization Agreement. Their message has been even clearer: Things cannot carry on as they have.

      In a sweeping statement of intent in October, the TSA said it is advising its members to hold the line in spring 2010 rate negotiations and target $800 per 40-foot container increases on shipments from Asia to the U.S. West Coast and $1,000 on intermodal or all-water shipments to the U.S. East Coast.

      'No question, the scheduled increases are significant, and we recognize that our customers too, have suffered from the global financial crisis,' said Philip Chow, OOCL chief executive officer, at the time. 'However, these increases must be viewed in the context of the equally sudden and significant volume and rate declines seen in early 2009. In many cases these recommended increases will only return carriers to where they were in late 2008 in terms of revenue per box. The 2010-11 program reflects a determination, finally, that the race to the bottom on pricing in the transpacific must stop.'

      The recommended increases are, of course, non-binding since the TSA is not allowed to mandate rates for its members. So what transpires behind the closed doors of confidential negotiations between shippers and carriers in a few months will likely shape the future of the transpacific for years to come.

      Carriers are no doubt struggling. APL, for instance, said in early December that while its volume for the four-week period ending Nov. 13 was 23 percent higher than in the same period in 2008, rates on that volume were down 28 percent.

   Through all the talk of excess capacity, idled fleets, delayed ship deliveries and cost-cutting measures, it has to be noted that revenue is the fundamental driver of business in the liner industry. And revenue is linked directly to rates and surcharges, both of which were depressed for much of 2009.

      In 2010, it's reasonable to expect demand to be low in the early stages of the year and gradually ramp up as the year progresses. A surge in orders in late summer and early fall 2009 led to the impression that a recovery was taking hold. In reality, it was primarily retailers who hadn't ordered anything for months replenishing their bare-bones stock levels prior to Christmas. The falloff in November underscored that story.

      So volume might look bleak to carriers in the off-season this year, but they are seemingly better prepared. Since the first week of December, the industry was witnessing the highest level of fleet idling in history, both in terms of raw TEUs and as a percentage of the total fleet. According to the maritime news service Alphaliner, 1.5 million TEUs, representing 11.7 percent of the global containership fleet, were out of service.

      Now demand will rebound some in March. And the whole industry has one positive going for it: barring another unforeseen economic catastrophe, 2010 numbers will necessarily look better than the corresponding 2009 numbers, meaning there will be positive growth and all the good feelings that engenders.

      But carriers are under no false illusions. Shelving ships to better align capacity with demand is not a good situation for them to be in long term. Even if rates improve after spring negotiations, carriers will have to offset not just poor rates throughout 2009, but also the costs of idling ships and the financing of assets that are earning no revenue.

      Rates will not rise to that extent, no matter how stringent carriers are.

      It's a measure of how serious the transpacific situation is that Maersk Line decided in early November to rejoin the TSA after a five-year absence.

      'Five years ago, the market conditions were vastly different than they are today,' said Lars Mikael Jensen, vice president of Pacific trade, network and product for Maersk Line. 'It is imperative that service levels involving vessel capacity and string frequency across the Pacific do not suffer as a result of continued rate deterioration.'

      It has been surmised that when Maersk left the TSA in 2004, it felt that it could secure higher rates on its own during a booming period on the transpacific. That Maersk has had to form previously unheard-of vessel sharing arrangements on the transpacific with European competitors Mediterranean Shipping Co. and CMA CGM was perhaps a foreshadowing of Maersk's re-admission to the TSA. MSC and CMA CGM joined the TSA in 2007 (with CMA CGM rejoining as Maersk had done).

      Maersk stressed that it wanted to restore profitability on the trade and that it had 'demonstrated market leadership in this regard,' but an interesting tidbit arose from Maersk Line CEO Eivind Kolding's interview with Bloomberg in November. 'Our market share is not large enough for us to go out on our own and lift rates,' he said. 'We need the other market players to do it with us.'

      Market conditions have changed since five years ago, not only in terms of demand and rates, but also in terms of market share. While Kolding said Maersk doesn't have the muscle on its own to affect rates, the Danish line has grown its market share more than any other carrier or alliance on the transpacific since the start of 2009.

      According to American Shipper affiliate ComPair Data, on Jan. 1, 2009, Maersk had about 23,000 TEUs of weekly capacity on the Asia/U.S. West Coast trade ' or 38 percent of the leading alliance, the CKYH carriers, which had nearly 59,000 TEUs of weekly capacity. By July 1, Maersk had more than 39,000 TEUs of capacity on the same trade, or nearly 64 percent of the CKYH Alliance's capacity.

      That's a huge jump.

      By the beginning of December, Maersk was down to 29,600 TEUs of weekly capacity, or 48 percent of the CKYH Alliance. That, however, does not include CKYH's planned rationalizations in December, which include a 10 percent culling of space to the West Coast and 20 percent to the East Coast.

      It's clear Maersk has grown its share of the trade relative to the biggest alliance. The Grand Alliance, which started the year as the second-biggest alliance on the transpacific and is now third, has held fairly stable throughout the year in terms of weekly capacity, from offering 33,000 to 36,000 TEUs a week to the U.S. West Coast. The New World Alliance has upped its capacity from 30,000 TEUs a week to the U.S. West Coast at the start of the year to 38,000 TEUs as of Dec. 1.

      Meanwhile, Maersk's transpacific partners have fared differently. MSC's capacity on the Asia/U.S. West Coast lane has dwindled since October. The line reached 13,000 TEUs of weekly capacity on Oct. 1, down to 7,400 TEUs by Dec. 1. CMA CGM's also grew from October, from 11,000 TEUs per week to 12,700 TEUs.

      In fact, Maersk Line's share on the Asia/U.S. West Coast lane has grown to such an extent that as of early December, it is the second-biggest single provider of capacity on the trade, bested only by Hanjin. In April, it was the fifth-largest. Since July, Maersk has also been the biggest provider of capacity from Asia to the U.S. East Coast.

      Still, Maersk's is losing money by the hatful, just like everyone else. While they may be better placed than most lines to weather the storm (see ocean column, page 22), even the top dog can't go on indefinitely losing money on each box it moves.

      The question, again, is whether rate increases will stick in spring.

      Large volume shippers may, as usual, be able to negotiate down some of these increases, particularly given that global fleet capacity is forecast to rise more than 14 percent in 2010, according to Alphaliner.

      And judging by comments from shipper advocates, the rate increases won't be digested smoothly, no matter how conscious shippers are of carriers' economic woes.

      'Pricing should be set on the basis of what your individual costs are,' said Michael Berzon, president of Mar-Log and chairman of the National Industrial Transportation League's ocean transportation committee. 'All ships are not equal, so to come up with an arbitrary increase for everybody, to me, is ridiculous.'

      Or as NIT League President Bruce Carlton said at a press conference at the Intermodal Association of North America's annual conference in November: 'Other industries don't sit around and say, 'Let's benchmark price.' '

      Another movement to take note of is the U.S. Federal Maritime Commission's intent to study the October 2008 European ban on rate-setting liner carrier conferences and how it has impacted U.S. trade.

      A key premise behind the study, FMC Chairman Richard Lidinsky told American Shipper, is to determine whether the abolition of conferences caused carriers to cut rates in the trade lanes to and from Europe as the result of new competition, and whether they have tried to make up those revenues in other trade lanes.

      The NIT League is opposed to not only the rate-setting conferences that the European ban abolished, but also discussion agreements like the TSA. But Berzon admits that's a far-off dream.

      'We're jealous of (the EU) situation,' he said. 'We'd like to be in the same situation as European shippers. But it will probably be another four to six years before we can get the remains of antitrust immunity (in the United States) before Congress.'

      If rates weren't a big issue for shippers in 2009, it's solely because they were so low that shippers (mostly) had a hard time finding anything wrong with them. Whereas freight rates fluctuated wildly on the Far East/Europe trade due to the more frequent nature of contracts there, they've been on a gradual downward spiral on the transpacific for more than two years now.

      What will change this year is that carriers say they are not going to make the same mistakes they made in 2009, and that no matter how much capacity comes online, they'll fight to earn sustainable revenue.

      Ocean freight rates on the transpacific will rise in 2010 because they have to. Whether they rise to the level that carriers would like, and say they need, is dependent on how closely the TSA carriers stick to their October 2009 plans.

      'The basic market characteristics (in the transpacific) are unchanged ' a two-to-one cargo and equipment imbalance will increase as demand resumes, fuel price volatility will continue, infrastructure and environmental costs will rise,' said Kenji Mizushima, director and managing corporate officer for liner trade at NYK and a member of the TSA Executive Committee. 'The revenue to address those challenges simply isn't in the current rate structure.'

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