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Home News World Shipping News Troubled times for Asia-Europe carriers
Troubled times for Asia-Europe carriers PDF Print E-mail
Friday, 19 June 2015 08:48
Lloyds 15/6/15
 
 
Analysts warn of difficult months ahead as spot rates plunge to new lows
 
With Asia-north Europe freight rates at an all-time low, analysts have been
quick to highlight what promises to be an uncertain few months for carriers
operating in the vital east-west trade.
 
Shipping lines will be pinning their hopes on their next round of general rate
increases announced for July 1. 
 
However Drewry's director of container research, Neil Dekker, told
Containerisation International that there are no immediate signs to suggest
these proposed price hikes will not follow the same fate as June’s failures.
 
“The current rates are unsustainable and are well below breakeven levels, but
there are no immediate levers in sight to help the lines carry through a
successful GRI in July,” he said.
 
“A peak season of sorts is expected during the usual summer months, but it is
unclear if the cargo spike will be enough to lift load factors and aid a full
rate recovery.”
 
Mr Dekker noted how much of the recent rate declines has been largely
attributed to the weakness of demand and the steady delivery of newbuildings, and it may
come as a surprise therefore that during this period load factors haven’t
fallen drastically, with utilisation levels on the headhaul trade hovering round the
85% mark since the turn of the year.
 
He said with ships relatively full, there should not have been such dramatic
rate erosion.
 
Since mid-February, Asia-north Europe rates on the Shanghai Containerized
Freight Index have fallen by more than 70% from $1,003 per teu to $284 per teu.
 
“The ‘normal’ market dynamics are out of sync and there is no doubt that all
lines are simply pushing the rates down every week since they are all so scared
of losing any base cargo from volume shippers,” he said.
 
While the collapse of the market to Russia has not helped the dynamics and
aggressive forwarders have also helped to drive the market downwards, he
explained “make no mistake — this is another rate war”.
 
Spot rates, of course, represent only a small percentage of the market, with
the large majority of cargo agreed as part of longer term contracts, typically
three, six or 12  months' duration.
 
However, these are usually negotiated taking into account the current state of
the spot market, and as Mr Dekker points out, those that agreed annual
contracts back in January of between $1,600 and $1,700 per feu or higher will have felt
pretty aggrieved. 
 
Some have since been allowed to move cargo at prevailing spot market levels, he
added.
 
With the spot market in freefall, the question that remains is what options do
carriers have?
 
Denmark-based analyst SeaIntel believes that unless there is a sudden surge in
demand for Asia imports, one of two scenarios can be expected.
 
Firstly, carriers will initiate further capacity reductions to offset the
influx of larger vessels being rolled out on the Asia-Europe trade in the form of
outright service cancellation, service downgrading or an extensive blank
sailings programme.
 
If carriers choose to close entire strings, however, the vessels that operated
these services will have to be deployed elsewhere and this extra capacity could
prove even more problematic on other trades, making the decision quite
complicated for the carriers, said SeaIntel.
 
The second scenario, according to SeaIntel, is that carriers choose not to make
such drastic capacity reductions.
 
This would mean that rates would come under even more pressure than they
already are, with the potential of sending many carriers into the red for the majority
of 2015.
 
Yet there is a third option, mirroring the drastic action taking by carriers
between 2008 and 2009 during the global financial crisis, when a significant
amount of capacity was laid up.
 
“The challenge to this option is that the carriers laying up vessels would bear
the entire financial burden of doing so, while those that do not would also
reap the benefit,” said Seaintel.
 
“Further, some of the largest carriers with the greatest flexibility in their
fleets to engage in large scale lay-ups, eg Maersk Line and CMA CGM, have
outperformed the industry in recent years, and it is doubtful that they would
be inclined to ‘bail out’ the rest of industry in these tough times.”