CSAV in peril?
In November, three European carriers that had cooperated in the Europe/Caribbean and West Coast South America trades with CSAV for many years announced they were breaking ties with the Chilean carrier and would begin operating their own exclusive loops to service the trade.
CMA CGM, Hapag-Lloyd and Hamburg S'd said the benefit of the move was to be able to directly operate their own vessels on the route, essentially the ability to control their own destiny.
While the move seems innocuous, in breaking away from CSAV, the carriers could very well be undermining and isolating the South American carrier in one of its key home trades. Standard & Poor's in November downgraded CSAV's credit rating, saying the downturn in the global container shipping industry has adversely affected the carrier.
'The action reflects the deeper-than-expected deterioration in the global container ship market, which for CSAV resulted in an extremely poor performance that substantially weakened its credit metrics and liquidity position,' the New York-based credit rating agency said, as reported by the Nov. 25 Shippers' NewsWire. 'Although the company has recently announced that it will speed up an equity increase of $200 million (originally planned to be injected during the next two years), we are concerned about the company's ability to improve its profitability and cash-flow generation, which is currently negative.'
CSAV, according to AXS-Alphaliner, owns just four containerships and charters 89. Between its affiliate carriers CSAV Norasia, Libra-Montemar and Libra Uruguay, it has 25 vessels on order (though CSAV's own records only show firm orders for 11 container vessels).
Such a heavy reliance on chartered ships would seem to be a good thing in a down market, unless the vessels are on long-term charters far more expensive than the going rate on the spot market, which would seem to be the case.
In any event, the European lines' move to break away has placed CSAV in a potentially precarious position. The carrier, South America's largest, has had its spats with European carriers before, but not in such a downturn generally.
'Viewed overall, and against a weak cash flow, CSAV's position is operationally mediocre and not particularly cost-competitive in the face of larger ships deployed more productively in multiple loop and multi-carrier alliances,' said Francis Phillips, of American Shipper's sister company ComPair Data. 'Over several years in cross-trades like Asia/Europe, where it operates as CSAV Norasia, CSAV has become shunned by big friends and is now highly vulnerable to undermining by all its competitors.'
Europe's big boys are likely watching with great interest what happens to CSAV in the new year. Maersk Line Chief Executive Eivind Kolding, for instance, has made noises about further consolidation in the industry being necessary, without singling out any particularly vulnerable carrier or trade.
'As always we are interested if the right opportunity presents itself, however, as a principle we do not speculate on names or comment on rumors,' Maersk spokesman Michael Storgaard told American Shipper.
And major European carriers have been increasing their stakes in the Europe/South America East Coast trade in recent weeks. That trade, another key one for CSAV, is a place where capacity is actually growing while it stagnates or shrinks in the major east-west trades.
CMA CGM told American Shipper in December it has no plans to take over CSAV nor is it considering any.
'We have always cooperated smoothly with CSAV on the Europe to South America West Coast trade, but as the world's third (largest) container carrier, it was only natural that we keep growing on this trade by becoming a vessel provider instead of being only slot charterer,' CMA CGM spokeswoman Claire Michel said. 'We will now be deploying two container vessels, thus increasing our allocation on this fast-expanding market. This is another major step in the group's continued development in South America as a whole, and on the West Coast in particular.'
But activity is taking place all over South America.
In the fall, Mediterranean Shipping Co. and CMA CGM both launched new services linking Europe to South America's East Coast, moves that seemingly introduced too much capacity for all to survive. On the other hand, the European carriers may be attempting to show just how poorly the new EU regulations on liner shipping will work. The regulations prevent established lines from jointly determining rates and capacity in a Europe-based trade, a right they had before October.
Charter rates plummet
Speaking of charter rates, industry publications have chronicled just how far the container charter market has fallen.
In November, major German ship financier DVB Bank said charter rates fell to the point that owners weren't able to meet their operating costs. Worse, the poor rates could jeopardize the owner's ability to meet debt payments, the bank said.
The Journal of Commerce reported that a 3,500-TEU Panamax vessel earning $25,000 to $30,000 a day in fall 2007 was getting $10,000 to $16,000 since September 2008.
The world's biggest shipping lines are heavily dependent on chartered vessels, with AXS-Alphaliner reporting that Maersk Line charters 45 percent of its capacity, while MSC is at 48 percent and CMA CGM at 69 percent.
With more than 120 vessels in lay up, and more expected over winter, it's hard to see how these rates will rise anytime soon.
Also, the laid up ships could have an effect on cascading. Two years ago, when shipping industry analysts were calculating how carriers would deploy the 10,000-TEU-plus vessels coming online this year and next, they figured that 5,000- to 6,000-TEU vessels would be shifted into secondary trades, like the transatlantic.
But now it seems that the largest vessels, including some new ships, could be laid up, delaying that cascading effect at least for the time being. The result is that the transatlantic is probably right-sized as far as supply and demand for now.