Asia-Europe rates further contract

Asia-Europe rates further contract

Spot rates on the Asia-Europe and Mediterranean trades continued their downward spiral, even as container shipping lines wearily prepared to hit the market with the second general rate increase this month. The Asia-Europe rate fell by 22.3% to $ 456 per 20 foot container, shedding $ 132 during the week. Asia-Mediterranean routes fared even worse, with the rate declining 27% to $ 448 per TEU, according to the latest reading of the Shanghai Containerised Freight Index. Carriers are stubbornly sticking to their GRI strategy, even though it remains little more than a straw grasping measure. 

On 20 September OOCL raised freight rates for westbound traffic from Asia to North Europe, the Mediterranean and the Black Sea by $ 550 per TEU. Also hiking rates on 20 September was CMA CGM, with GRI of $ 500 per TEU encompassing all cargo originating in Asia and heading to North Europe. Usually the spot rates would have climbed the week ahead of a GRI, but with no peak season to speak of, the market appears to be ignoring the plans for a rate hike. Profitability on the route has vanished and when the freight rates are compared with the same week last year, the reason is starkly apparent. In the same week during 2014, the Asia-Europe spot rate was 60% higher than what it is today. There is little light at the end of the Asia-Europe tunnel for the carriers. Rickmers Maritime said the trade will see an increase in average ship size of around 30% over the next five years, a result of the many orders for vessels greater than 20,000 TEUs. While the tumbling Asia-Europe spot rate was hardly a surprise, the US trades also recorded negative numbers, especially on the usually stable all-water route to the East Coast. 

 

Ship owners’ business model shake-up looms

Traditional ship owning models need a fundamental re-think according to two prominent owners who have very different ideas about what the looming shake-up looks like. The opening session of the London International Shipping Week Conference saw Wah Kwong Chairman Sabrina Chao go head-to-head with Euronav Chief Executive Paddy Rogers on the issue of size and access to capital. Rodgers’ view that small is not beautiful when it comes to shipping and that traditional models of bank financing to family owned companies is over, was pitched against Chao’s view that publicly listed companies are not for everyone and many are not being rewarded for being an asset heavy company. 

The debate, which was reflective of wider conversations happening throughout the industry, highlighted the growing divide between differing growth strategies for shipping companies. Rodgers’ approach emphasises the importance of economies of scale that he argues is only possible when you have access to capital as a public listed company. Unsurprisingly, Chao rejected the suggestion that traditional ship owning businesses are completely outmoded model, however she does concede that fundamental changes are needed. I think that the business model of traditional ship owners on long term time charter rates is no longer feasible, simply because there are not any around at the moment, she told Lloyd’s List on the sidelines of the conference. 

 

Shanghai Container Shipping Index only follows the market

Simmering tensions between top container lines and the Shanghai Shipping Exchange (SSE) over unprecedented price volatility in the container trades burst into the open on Friday, with the two sides differing over the cause of huge swings in freight rates from week to week. SSE president Zhang Ye responded immediately to claims that the Shanghai Containerised Freight Index published each Friday was contributing to unstable market conditions. The SCFI was a reflection of the market and is not adding fuel to the volatility of rates, Zhang told Lloyd’s List in direct reply to observations about the index from NYK Line Chief Executive, Jeremy Nixon. 

One area that probably doesn’t help the situation is the Shanghai Containerised Freight Index, which offers complete transparency to what the spot market is doing week by week and that is simply exacerbating the situation, he claimed. Zhang rejected those allegations, however, saying that the SCFI was following the market not leading it. The spot rates covering 15 major routes from Shanghai that comprise the SCFI already exist, Zhang said. The index was not setting prices but following the market. 

The reason why the SCFI fluctuates is a reflection of the volatile rates. He noted that the Baltic Dry Index had shown huge swings over the years, yet no one is saying it had destroyed the market. The SSE began publishing the SCFI in 2009 when rates were at rock bottom and it has now become a widely used market indicator, mirroring the endless price wars that characterise main trade lanes. 

 

Rising freight crimes

Rising fright crime levels have prompted the Transported Asset Protection Association (TAPA) to launch a global campaign to double the number of TAPA certified warehouse facilities to over 2,000 in Europe, the Americas and Asia Pacific in the next three years and to make a ‘quantum leap’ in the number of trucking companies operating in compliance with the association’s security standards. The association said the threat of cargo crime continued to increase across the globe, with TAPA EMEA (Europe, Middle East and Africa’s) Incident information Service (IIS) recording a 24% year-on-year increase in the first half of 2015 in industry-wide cargo crime incidents. 

TAPA said its research indicates that TAPA members are far less likely to be victims of cargo crime because of the measure they have introduced. TAPA was formed in 1997 to tackle the multi billion Euro problem of cargo thefts from the supply chain. Today, it boasts over 800 member companies globally, including many of the world’s biggest manufacturers and logistics service providers as well as leading SME freight forwarding and transport operators and other stakeholders. 

 

COSCO and China Shipping merger to go through

COSCO Group and China Shipping Group have completed a draft merger plan and are awaiting Beijing’s approval raising hopes that the two state conglomerates might soon unveil their consolidation scheme. The State owned Assets Supervision Administration Commission of the State Council, which oversees the country’s State-owned enterprises, is currently reviewing the draft, based on the guidelines for state owned enterprise reform that Beijing released on Sunday, a person close to SASAC told local media 21st Century Business Herald. 

The guidelines call for broad reforms, including allowing SASAC to establish its own investment arms in parts similar to Singapore’s Temasek System. The news comes after the announcements from the major listed units of COSCO and CSG that their stocks may begin trading again within a month. Shanghai and Hong Kong listed China COSCO Holdings, which has suspended trading since 10 August, said its parent is planning a material even that involves ‘asset reorganisation’, according to exchange filings. 

An application has been made by the company to further suspend trading in the shares of the company from 16 September. It is expected that remaining time of the suspension of trading will not exceed one month, stated one exchange filing.

 

China, world’s 3rd largest ‘country carrier’

If all 16 Chinese liner carriers from the top 100 were included in the possible merger of China Shipping and COSCO, then China would become the world’s third largest ‘Country Carrier’ with a current fleet of 605 container ships of a total capacity of 1,879,000 TEU. On a country level, thanks to Maersk Line and Unifeeder (still excluding Tschudi), Denmark would be number one with a total capacity of 3,091,000 TEU, followed by landlocked Switzerland with, a single contributor, MSC (2,674,000 TEU). At nine entities each, the US (13th) has the same number contributing carriers as South Korea (8th). The size of the Japanese archipelago’s armada (1,516,000 TEU) is 24 times larger than the UK’s 62,000 TEU, to mention another comparison. The 20 Country Carriers have a share of 80% of all containers carrying ships and 94% of global TEU capacity.

 

Lay-up/idle vessels, increase

The consequences of a combination of low demand and too much capacity are clearly kicking in. As of 24 August, compared to two weeks earlier, the laid-up box ship fleet had risen by 26 ships/106,600 TEU to 175 vessels and 483,900 TEU. Remarkable is the idling of five ships of 7,500+ TEU, all under control of the carriers and most probably North Europe-Far East excess tonnage. Notwithstanding, by number of vessels, it was the non-operating owners taking the biggest hit.

(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).)