Container freight rates to fall further
The Shanghai Containerised Index is taking a break for China’s annual Golden Week, but sadly there is no break for the world’s ocean carriers amid reports that rates will decline even further this month. Rates fell across all trade lanes last week on the SCFI and box prices on the Asia-Europe trade fell to their lowest level for nearly a year. Alphaliner warned that the reluctance of carriers to reduce capacity on the Asia-Europe and transpacific trades in the winter slack season will increase pressure on rates even further.
With shipping lines pushing back their October GRIs to mid-month to coincide with Golden Week, Alphaliner warns that attempts to revive rates will be hindered by overcapacity as lines refuse to withdraw services, seeking to safeguard their market shares.
Further uncertainties will be created by the introduction of the 2M and Ocean Three Alliances, if they receive regulatory approval, said Alphaliner. However, Freight Investor Services Brokers Richard Ward says reports suggest that some lines are looking to reduce capacity.
This coincides with the announcement from NYK Line this week that it will increase rates on the Asia-Europe trade by as much as USD 920 per TEU from 1 November, he said.
“The apparent co-ordination has been achieved by more luck than judgement with Evergreen reportedly not sailing one of its recently delivered new builds because of an apparent inability to fill the vessel,” said Ward. “Superstition dictates maiden voyages that are not fully utilised are bad luck and as such the company has decided to withdraw the vessel and replace it with reduced tonnage.” “Time will tell whether additional carriers decided to use this as a catalyst to reduce capacity further in an attempt to restore rates from their 12 months low.”
Ocean Three and 2M carriers to dominate
A massive shift in market share on the East-West trades is in the pipeline as the order book of the Ocean Three (O3) and 2M alliances will see their combined mega-vessel capacity eclipse that of their more established G6 and CKYHE rivals. “2M and O3 are outpacing the other two alliances when it comes to the order book, particularly when it comes to the mega ships,” SeaIntel COO Alan Murphy told the Liner Shipping conference in Singapore.
The O3 tie-up is between CMA CGM, China Shipping Container Lines and United Arab Shipping Co., while Maersk Line and Mediterranean Shipping Co., will partner in another vessel sharing agreement. “The average vessel size is a strong indicator of the cost efficiency indicator of a line and here 2M and O3 have a massive advantage over G6 and CKYHE carriers, with 2M dominant in vessel size.” But O3 is not the group of rejects, Murphy pointed out. “CMA CGM is a force into its own and has very interesting partners which all have mega vessels that are new and fuel efficient. There is no doubt about it, O3 is coming in ahead of the G6 and CKYHE and have a clear vessel advantage,” he said.
The three O3 carriers have ultra-large container vessels on order that will allow them to maximise economies of scale on their combined services. UASC has six 18,800 TEU ships on order and China Shipping is awaiting delivery of five 19,000 TEU units, which will be the largest container vessels afloat. CMA CGM has six 17,700 to 17,800 TEU units on order, scheduled for delivery in 2015.
CMA CGM is the world’s third largest carrier behind Maerska nd MSC, with a 1.6 million TEU fleet and a 8.6% share of global deployed capacity, according to industry analyst Alphaliner. China Shipping is ranked seventh with just over 687,999 TEUs and a 3.7% market share and UASC is in 19th position with almost 294,000 TEUs and a 1.8% market share. China Shipping and UASC were already planning to cooperate in the Asia-Europe trades following the contracts for ultra-large vessels.
Ocean Three will compete head on with the 2M, G6 and CKYHE alliances on the major East-West routes, which are facing mounting pressure on freight rates as even larger ships are flooding markets at a time of modest traffic growth.
The new alliance’s strongest presence will be in the Europe-Asia trade where it is estimated to have a 20% market share, ahead of 13% and 6% shares in the trans-Pacific and trans-Atlantic, respectively. This contrasts with the 2M’s estimated 35% share of the Asia-Europe trade, 15% in the trans-Pacific and a dominant 40% across the Atlantic.
Carrier agrees to $ 67 million price-fixing fine
The Japanese carrier ‘K’ Line entered a plea agreement with the US Department of Justice which, subject to court approval, will see it pay a fine of $ 67.7 million to resolve a case. The DOJ said K Line had been involved in ‘a conspiracy to fix prices, allocate customers and rig bids of international ocean shipping services for roll-on, roll-off cargo, such as cars and trucks, to and from the United States and elsewhere’.
The charges related to ‘K’ Line’s actions from as early as February 1997 to at least September 2012 over which period the line ‘conspired to suppress and eliminate competition by allocating customers and routes, rigging bids and fixing prices for the sale of international ocean shipments of roll-on, roll-off cargo to and from the United States and elsewhere, including the Port of Baltimore’, said a DOJ statement.
Bill Baer, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division, said the case was part of a long running global conspiracy which had affected the shipping costs of ‘staggering numbers of cars, into and out of the Port of Baltimore and other ports in the United States and across the globe’. He added, “We are continuing our efforts to ensure that both the Corporations and ‘individuals’ involved in this cartel are held accountable for their acts and the harm they inflicted on American consumers.”
‘K’ Line said it would continue to co-operate with investigators and would take steps to strengthen its compliance and training programs to prevent falling foul of rules and regulations in the future.
Cost savings more than just bunkers
The savings to be gained from a container line getting more miles to the gallon are immense. Take NGL Group, in just over two years the Singapore based company managed to save $ 1.2 billion with more than half the savings coming from cuts in bunker consumption and better network management at its liner division, APL.
“This is made possible by factors such as improved vessel speed management and the entry of bigger, technologically advanced and highly fuel efficient ships into the APL fleet coupled with the progressive return of smaller, expensive and less efficient chartered vessels,” an APL spokesman told JOC.com. “These effectively lifted the APL fleet’s overall fuel efficiency through optimised fuel consumption.”
The bunker price has played along with the cost savings game, supporting the stressed balance sheets of the world’s carriers. Drewry data reflected the Rotterdam price of IFO 180 bunkers dropping more than $ 60 since the end of June to $ 570 per ton. However, hanging cost saving efforts on the price of oil was not sustainable as it applied to all carriers and was eventually passed on as lower freight rates, according to Lars Jensen, CEO of SeaIntel.
“The sustainable path to reduced costs lies in a systemic approach to cost savings related to better understanding of total network costs,” he said. Container lines are building larger vessels to optimise economies of scale and lower the carrying costs per 20 foot unit, but Jensen said it was about more than just having large, fuel efficient vessels in the fleet.
“You need to ensure that costs related to the usage of this vessel, i.e. feeder costs at either end, inland costs equipment repositioning etc., are properly taken into account. This results in a level of complexity where systematic reliance on computer models rather than gut feeling becomes critical in turn, this can only be accomplished by a fundamental shift in mindset within the carriers a shift wherein Maersk Line appears far ahead of their main competitors,” Jensen said. Underpinning the Maersk Line approach is the belief that freight rates will not improve any time soon. CEO Soren Skou said that rates had fallen by 2-4% over the last 10 years and that trend was unlikely to be reversed and the company strategy would remain firmly on cutting costs.
2M needs no approval from China
Maersk Line and Mediterranean Shipping Co, do not required regulatory approval from China for their proposed ‘2M’ vessel sharing agreement on the East-West trades, Maersk Line said. But the company left open the possibility that Chinese regulators may not automatically approve the agreement.
Since the agreement is only a vessel sharing agreement and not a full fledged alliance with its own joint vessel operations centre, the world’s two largest container lines only have to file the agreement with the Ministry of Transport and will avoid the Ministry of Commerce, which in June rejected the proposed P3 Network alliance involving Maersk, MSC and CMA CGM.
“The requirement with China is that we file with MOT and there are no additional requirements,” said Maersk Line spokesman Michael Storgaard. “It doesn’t mean the authorities won’t come back and ask questions and keep an eye on things, but that’s it.” Maersk and MSC filed with the MOT in July, he said. He added no filing is required for the VSA to received European Union approval.
US approval by the Federal Maritime Commission is required and the carriers will be filing with the agency ‘within a couple of weeks’. According to Maersk and MSC, the 2M will involve a total of 185 vessels with an estimated capacity of 2.1 million TEU, deployed on 21 strings, with Maersk supplying 55% of the capacity and 45% coming from MSC.
Salalah volumes slide
The Port of Salalah, Oman, saw its container volume slide 7% year-over-year in the first half of 2014, but general cargo throughput jumped 28%, port operator Salalah Port Services said in a written statement. The container terminal handled 1.63 million 20 foot equivalent units in the six month period, compared with 1.75 million TEUs a year earlier. General cargo tonnage totalled 5.46 million tons.
“The decline in container activity is due to lower volumes from some of the existing liner customers in addition to delays in new businesses materialising,” port Chairman Ahmed Al Mahrizi said. “The port commercial teams continue to endeavour growing volumes from existing customers and attract routes through Salalah to a number of new destinations.” Salalah’s consolidated net income tumbled 19% year-over-year in the first half of 2014 to $ 8.3 million on revenue of $ 73.4 million, down 3% year-over-year. “Competition is growing in the region, with new port capacities emerging. Profitability, capacity and market share are the fundamentals which the company continuously manages between risk and opportunity,” Mahrizi said.
The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).