Asia-Europe rates tumble to $ 313 per TEU
Freight rates on the Asia-Europe trades have tumbled for their third successive week to levels approaching the all time lows witnessed in June. The latest Shanghai Containerised Freight Index (SCFI), shows that rates to north Europe from Asia fell by a further 31.4% to $ 313 per TEU and to the Mediterranean by 30.1% to $ 313 per TEU.
When rates crashed to their historic lowest spot market price earlier this year, to $ 205 per TEU on Asia-north Europe routes and to $ 274 per TEU on Asia-Mediterranean services, analysts at SeaIntel calculated that carriers were in effect paying to ship their customers’ cargo, as once surcharges were removed, including bunker adjustment factors, rates had fallen below zero.
In response, carriers moved to cut capacity on the trade but with peak season demand much lower than anticipated sustained general rate increases have been hard to hold. The most recent attempt came when lines including Untied Arab Shipping Co, CMA CGM and Maersk pushed for GRIs ranging from $ 500 to $ 600 per TEU. However, these efforts were firmly shunned by the market in what was their last opportunity to raise prices before the Chinese Golden Week at the start of October.
The weakness of the spot market in the second quarter was reflected in the financial figures of nearly all of the major carriers, with profits and revenues down markedly on last year. Carriers had pinned their hopes on the peak season providing much needed respite from their freight rate woes on the Asia-Europe trade, but it seems that results for the third quarter could make for difficult reading for a number of lines. For the final three months of the year, carriers have moved to reduced capacity further with all four of the major alliances announcing cuts in some shape or form.
Whether this will enable them to sustain rates as a more respectable level in the months ahead remains unclear, but what is certain is that carriers will be under even greater pressure to address the supply-demand imbalance on the trade given the failures of months gone by.
China manufacturing plunges
China’s factory output which has a bearing on Ports and Shipping contracted further in September, falling to its lowest level in more than six years as weak external demand continues to put the brakes on the country’s exports. Major container ports in China reported their slowest growth of the year in August and the steady decline in manufacturing this month is an indication that exports will remain weak into the fourth quarter.
The Caixin flash Purchasing Managers’ Index (PMI) for September fell to 47 from last month’s 47.3, while general manufacturing output was even lower with the index hitting 45.7 in September, down from 46.4 in August. Anything less than 50 on the index indicates contraction. The principle reason for the weakening of manufacturing is tied to previous changes in factors related to external demand and prices.
Forwarders struggle with price volatility
For more than a year, large monthly ocean spot rate surges prompted by shipping line GRIs have been followed by slumps as customers agree discounts. For those charged with managing supply chains, this not only adds to oversight costs, it also generates significant inventory management challenges. Peter Orange, Regional Manager for freight sales at logistics group GAC, told Lloyd’s Loading List.com that the constant rate fluctuations were time consuming in terms of checking and verifying surcharges and linking these changes to bids and tenders.
GAC prefers to work with all surcharges being VATOS – Value At Time of Shipping – to ensure we are covered, he added. However many larger volume movers want surcharges that are fixed, which some carriers are willing to do based on minimum volume commitments. The variances and vagaries of how many shipping lines calculate these surcharges also adds to the confusion and we, possibly being cynical, think that perhaps this is deliberate, as it does not help the customer at all.
Another major player in the 3PL sector who asked not to be named said the constant ocean pricing surges and depreciations also complicated decision-making for shippers. It can become costly if the unknown degrees of financial consequence result in compromised inventory and supply chain planning, he said.
Container shipping, a bright future. Can it?
Container shipping has a bright future, despite the current rash of gloomy short-term forecasts, according to the CEO of Hapag-Lloyd. Don’t get completely carried away by the forecasts which are like stock markets, reacting instantly to every event, Rolf Habben Jansen told about 200 attendees at the JOC Container Trade Europe Conference in Hamburg. “What happens in the next two to three months is anyone’s guess,” Habben Jansen said in his keynote address, adding he is cautiously optimistic about the next two to three quarters.
Container shipping is fundamentally an attractive growth industry, with long term annual growth of between 3% to 5%; a pretty safe bet he said. There are not many other industries that grow faster than GDP. Carriers, Habben Jansen said, must take a long term view rather than look to short term forecasts because of the high level of investments in new vessels. The industry was already 20% bigger in 2014 than it was in 2008, a year before the 2009 financial crisis led to the deepest recession in decades and a related crash in cargo volumes.
Not many economies are bigger now than in 2008, he said. We should not forget this. Habben Jansen downplayed the widespread concern over surplus capacity over the past four to five years; arguing that the trend to build ever larger ships has run its course, as their incremental cost benefits over the previous size sector are not that big. Capacity, he added, will likely increase less than or very close to the growth in demand in the next 18 to 24 months. The situation won’t get any worse. Slowly but steadily it will get better in the long term. The order book, which hit a peak of 55% of the global fleet in 2008, has fallen to between 15% and 20%.
Top 25 container operators control 88%
Top 25 container operators control 88% of the existing world container capable fleet deployed in liner services. The share of their order book amounts to 19% of their existing fleet and to 83% of the world order book. Compared to three months ago, the composition of the Top 25 is unchanged, although some companies now rank in a different order. In more details, Evergreen over took Hapag-Lloyd (again) and now resides on the fourth place with a 32,000 TEU margin.
Hamburg Sud inched up four places to number eight. The biggest order book comes for the account of MSC, followed by Coscon and Maersk Line, after their recent shopping sprees. Comparing the present Top 25 with that of a year ago (July 2014) shows in particular the dramatic expansion of UASC (+59%) as a result of the steady influx of 14,000 and 19,000 TEU tonnage into its fleet.
Hapag-Lloyd sails with Initial Public Offering (IPO)
The world’s now fifth largest container liner shipping company Hapag-Lloyd has confirmed that it is preparing for a $ 500 million Initial Public Offering (IPO) this year, with the expectation that it will use some of the proceeds to order ultra large container ships. The company intends to list its shares on the regulated market of the Frankfurt Stock Exchange and on the regulated market of the Hamburg Stock Exchange in 2015.
In a statement to investors, Hapag-Lloyd said it expects total gross proceeds in the equivalent Euro amount of $ 500 million from the IPO. $ 400 million will stem from the sale of newly issued shares to institutional and retail investors. In addition, the core shareholders Kuhne Maritime (Kuhne) and CompaniaSud Americana de Vapores (CSAV) are participating in the IPO with $ 100 million by placing ‘cornerstone orders’ of $ 50 million each. Hapag-Lloyd said it intends to use the expected $ 500 million IPO proceeds for further investments in ships and containers to further strengthen its capital structure, long term growth and profitability. The offer will also comprise additional shares from shareholder TUI.
(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).)