Transatlantic belt-tightening

Transatlantic belt-tightening Carriers hopeful, shippers wary as capacity slashed, rates urged upwards.

By Chris Dupin

      After nearly a year of sharply lower volumes and freight rates, container carriers on the transatlantic trade took drastic action this fall to reduce capacity, and began efforts aimed at raising freight rates.
      Carriers hope the capacity reductions ' through pulling strings or reducing the size of ships on some lanes ' will be enough to staunch the losses they have experienced on the trade lane. Estimates are that carriers have reduced capacity on the transatlantic anywhere from 22 percent to 27 percent.
      The capacity withdrawal and rate hikes being seen in the industry are 'just an indication of the pain the industry is feeling. Some companies are going to be losing over $1 billion this year,' said Andy Abbott, chief executive of Atlantic Container Lines. 'The market hasn't changed so supply had to come down to meet demand.'

Dekker

      'The capacity reductions have been good for a trade, which has been very much in the doldrums,' said Neil Dekker, editor of Drewry Shipping Consultants' Container Forecaster. 'We do not expect any significant improvement on the demand side in 2010, but the capacity withdrawal should mean that carriers can force through a decent chunk of the westbound general rate increase,    which is due to be implemented in January and move operators towards a breakeven scenario.'
      In early December, forecasting firm IHS Global Insight said it expected U.S. growth to be in the 2 percent to 2.5 percent range compared to 2.8 percent globally in 2010. It said the U.S. recovery would begin the year slowly, and Europe would rebound even more slowly, with the eurozone and U.K. economies expected to grow 0.9 percent and 0.8 percent, respectively.
      'Some West European economies ' Iceland, Ireland and Spain ' will continue to contract next year as the aftershocks of the housing bubbles and financial crises take their toll,' it added.

Bingham

      The Atlantic capacity withdrawals are 'clearly showing a lot of discipline compared to some other routes where carriers have not reduced quite as much,' said Paul Bingham, managing director of global commerce and transportation at IHS Global Insight. 'If the total world fleet only has about 11 percent in layup, taking 22 percent out or something like that on the North Atlantic, is proportionately more than on other routes. But there may also be good reasons for that in that they have seen volumes fall more sharply than on other trades.'
      'The total market has weakened quite significantly,' said Soren Castbak, senior director of Atlantic services for Maersk Line. 'After the bubble burst in October 2008, our volumes dropped by 20 percent to 25 percent in both directions ' both in the North Europe and the Mediterranean trades. We assume 2010 is going to be another ugly year.'
      Jean Philippe Thenoz, vice president of North American lines for CMA CGM, said PIERS statistics show that in the first nine months of 2009, cargo exports from North Europe to the United States were down about 22 percent compared to the same 2008 period, while volumes from the Mediterranean to the United States dropped 18 percent.
      'Volume is down and has been down every month in 2009,' though he added there was some recovery in November.
      With transatlantic volumes down, Castbak said, 'we were running a series of strings across the Atlantic with unsatisfactory utilization because of this big drop in demand.
      'Rock bottom rates in some cases barely covered variable cost,' he said, with some rates falling $1,000 or more per container. 'There is not really an alternative other than to take capacity out so it is in line with the bookings we receive from our customers.'
      Since the market bottomed out in the summer, 'volumes have risen and space has become tighter, but the situation is still tenuous. I think carriers still have a long way to get to normalcy,' said Alan Clifford, executive vice president at Mediterranean Shipping Co. 'Rates had dropped so precipitously that the increases that carriers in general have instituted have just made a little dent.'
      But some shippers say that while they understand carriers' need to improve rates, they are also concerned that capacity may be overcorrected, reduced so much that there won't be enough space to move their products.
      And if cargo volume picks up, they wonder if steamship lines will reintroduce capacity quickly enough.

De Santis

      A.F. 'Tony' De Santis, executive director of the U.S. Shippers Association, said in early December, some of his members had cargo destined for Europe that was 'rolled' ' left on the dock ' because of a lack of space on ships leaving U.S. East Coast ports to Europe. In one case a shipper had 15 containers rolled to sailings one or two weeks later because of space shortages.
      'We are very concerned. Carriers are driving up rates and taking capacity out and it is coming at a bad time for some of our members because their volumes are coming back up,' De Santis said.
      Arnie Bornstein, a spokesman for Philadelphia-based logistics company BDP International, said executives at his firm have received indications that 'capacity will be put back in the trade as demand returns.'
      But he said carriers have also indicated to BDP Transport, its non-vessel-operating common carrier arm, that they are planning a series of substantial general rate increases over the next three quarters ' as much as 40 percent each in January, April and July.
      'From a PR point of view not even a Max Clifford or the U.S. equivalent of this PR guru could put a positive spin on 2009 on the transatlantic,' said Steve Walker, chairman of U.K. freight forwarder SBS Worldwide.
      'For us, it is hard work trying to understand, and then to explain to customers, short shipments on high yielding revenue containers. I know the lines are fighting for their existence, but reducing capacity to justify higher rates is no way to build good relationships with the forwarders and the shippers,' he said. 'With a 27 percent drop in capacity and also talk of slower vessels, it is no wonder that friendships in the business are being strained. And it does not appear that there will be any improvement in 2010 at this rate.'

'Fast And Heavy.' 'The general rate increases have been coming fast and heavy,' Bingham said.
      Maersk announced in October that it planned to increase rates $400 per 20-foot and $500 per 40-foot containers in both January and April on service to and from North Europe and by the same amounts in April and July on its Mediterranean services. It also plans further increases in October, with the amount to be announced.
      Castbak said the company hopes to get rates back to where they were before the market began to collapse in late 2008. He added Maersk wanted to give shippers plenty of notice so they could budget for the increases ' many contracts renew Jan. 1, and are negotiated quarterly or semiannually instead of on an annual basis.
      Thenoz said rates fell precipitously in 2009, and at one point westbound transatlantic market rates were 'negative' ' with some carriers essentially only collecting terminal handling charges at the discharging ports.
      'There was almost no freight left. It was an all-in rate, including THC. But once you deduct the THC, it was almost zero,' he explained. 'It is a trade where everybody has been losing a small fortune.'
      Abbott of ACL bluntly said rates that some carriers were offering were 'just stupid. There were numbers where people were charging $300 to $400. They were insane. The rates were couched within inland rates, so they looked like a bigger number. But if you took out the out-of-pocket expense, you were left with $300 to $400. You can lose a billion dollars if you do things like that.'
      The weak dollar 'has devastated us,' Abbott said. 'Every one of your European expenses goes through the roof. Fuel has gradually crept up and most of us do not have bunker surcharges; they are all these emergency things that never kick in.'
      ACL announced rate increases of $300 for a 20-foot container and $600 for a 40-foot container Dec. 1, and $250 and $350, respectively, on Feb. 1.
      'Even if I was to get 100 percent applicability, it would not bring me back to where I was a year ago. The numbers have fallen more than that in a year,' Abbott said.
      Thenoz estimates that industry-wide as of November, westbound all-in rates on the transatlantic, including freight, bunker and terminal charges, have about tripled from their nadir at the beginning of summer. Even so, he said they still haven't reached where they were a year ago.
      In contrast, he said U.S. rates back to Europe have been 'quite consistent' and better than on the westbound leg because of strong U.S. exports.
      'The last couple of months the head-haul on the transatlantic has been east,' said Castbak, where traditionally European exports have been stronger.
      Thenoz predicts carriers will be more strictly applying bunker surcharges than in the past.
      Carriers have relatively little control over bunker costs in the transatlantic. Unlike on longer routes, it is more difficult to slow steam. But Castbak said Maersk has added a ship to its West Med service so the ships can reduce speed.
      But with the reduction in capacity, things will look much different, he said. 'We can see with other carriers reducing capacity, we are now looking at very high utilization rates in the industry. It was 60-65 percent in the first quarter. Now we are getting close to 90 percent in utilization and in some weeks full ships.'
      Indeed, Abbott said ACL ships 'are at 100 percent in both directions, up to our eyeballs,' he said. ACL's ships can carry both containers and roll-on/roll-off cargo, and with the market for wheeled cargo weak, his company has taken to putting some containers on the ro/ro decks to increase capacity.
      After December when additional transatlantic capacity was scheduled to be pulled, Abbott thought the trade may 'go ballistic' as carriers scurry to meet demand.
      Castbak said U.S. shippers would face a different landscape going forward. In addition to fewer strings and less capacity to the Atlantic and Med, the supply of containers has also tightened ' and not just because of developments on the transatlantic.
      Fewer imports from the Far East are also contributing to a shortage of containers in some markets, particularly in parts of the Midwest.
'That situation is completely new in the fourth quarter of 2009 and it looks like it will continue well into 2010, as opposed to the beginning of 2009 when there was an abundance of containers,' he said.
      He added shippers could help carriers by forecasting what their transportation needs will be and also recognize that freight rates may include the additional cost of repositioning containers to where they need to be stuffed.