Freight rates below break-even point

From Daily FT 

Freight rates below break-even point

The latest Shanghai Containerised Freight Index shows that Asia-North Europe box prices slipped below $ 600 for the first time in nearly two years to $ 586 per TEU, down 5.5% or $ 34, on the previous week. Last year, carriers operating on the trade managed to implement a 44% increase at the start of April, from $ 843 per TEU to $ 1,214 per TEU. With freight rates currently well below the break-even point for carriers on the route, the pressure to replicate last year’s achievements are certainly on.

All eyes are firmly fixed on this week’s SCFI to see whether history will repeat itself, with lines pushing for GRIs of between $ 800 and $ 1,000 per TEU. Asia-Mediterranean carriers, meanwhile, will hope for similar increases this week in respect of their latest round of GRIs, after freight rates on their trade slipped for the seventh consecutive week by 9% or $ 73 to $ 735, representing their lowest level since October 2013.

Asia/Europe capacity rise but volumes flat

Growth in containerised imports and exports through North Europe ports is expected to flatten out this year after solid increases in 2014, according to the North Europe Global Port Tracer report. The report, produced by Hackett Associates and the Bremen, Germany based institute of Shipping Economics and Logistics, projects that North Europe imports will show no year-over-year growth in the first half of 2015 and that exports will rise only by 1.8%.

Last year imports at North European ports increased 9.5% while exports rose 8.4%. The growth came despite a slide in import volumes during the second half of 2014, except for December.  Separately, Alphaliner’s weekly newsletter reported that total weekly capacity on the Asia to North Europe route is expected to rise 9.1% this year as carriers replaced existing vessels with larger ships. Of the 21 strings on the Far East-North Europe route, 18 will deploy ships with capacities of over 12,000 twenty foot equivalent units by the end of 2015 and three will have average weekly capacity of 18,000 TEUs.

At the start of the year, 14 strings deployed 12,000 TEU capacity and one had 18,000 TEU ships.  Capacity growth will be led by ships in the Ocean 3 and CKYHE alliances, each of which is expected to increase capacity on the route by about 15% this year. Asia-Europe capacity growth is forecast at 6.5% for the 2M alliance of Maersk Line and Mediterranean Shipping Co., while the G6 alliance is expected to add only about 1%, Alphaliner said.  Increases in gauges of European consumer confidence and manufacturing activity haven’t translated into consumer spending growth, said Ben Hackett, founder of Hackett Associates.

It is unclear why the consumers are not yet ready to go on a shopping spree, he said. Perhaps it is the unpredictability of domestic politics with the ascendance of right-wing anti-immigration policies or the uncertainties of the situation in Ukraine and where it might lead, or perhaps it is a change in expenditure patterns that will have less consumption going forward. Hackett also said most outsourcing to Asia is complete and that more investments are being made in Eastern European countries close to end markets on the continent. These are changes that the container shipping industry needs to take into account when they consider their investments in additional capacity, he said.

Present shipping alliance  not the solution

Shipping lines should concentrate on expanding the scope of alliances to improve profitability and escape the vicious cycle of overcapacity, according to a new report from the Boston Consulting Group (BCG), which concludes that current attempts to improve the fortunes of container shipping lines by investing in ultra-large vessels create only a temporary competitive advantage, but in the long term it will accelerate overcapacity.

In total, BCG estimates that supply will increase by 30% to 24m TEU by 2019, while demand growth will slow. This will result in freight rates declining between 1.6% to 2.6% per year until 2019, which will put carrier profitability under further pressure. The report said that carriers’ cost reduction programs have helped improve performance, but to survive in the future they will need to adopt a more holistic approach and gain further savings from the alliance model.  Conventional alliance models tend to focus on optimising slot costs and extending network reach, the authors said. More sophisticated models could help carriers derive further savings from these partnerships through practices such as joint procurement, joint operations, equipment pooling, back-office consolidation and shared services and joint IT development.  BCG principal and co-author of the report Lars Kloppteck said: “Analysis of carrier specific data derived from BCG’s shipping benchmarking database suggests that advanced alliance models could deliver annual savings in excess of $ 1 billion.” This would reduce a mid size alliance’s estimated operating expenses by as much as 3%. BCG Senior Partner and co-author of the report Ulrik Sanders added: “Container shipping lines should focus on speeding up their transformation efforts and on unlocking the scale advantages promised by their alliances.

If they can accomplish these changes, we believe they could begin to lift their earnings to meet and possibly even exceed their cost of capital. The report recommends that carriers begin to improve profitability by sharpening their strategic focus and rethinking their approaches to network design, pricing, procurement and project execution.

Alliance role in port congestion, USA questions

A USA Federal Maritime Commissioner (FMC) is demanding that deep sea container alliances reveal what steps they are taking to reduce congestion at US ports. Commissioner Michael Khouri has asked that the FMC finds out what alliances are doing to reduce the impact of congestion that has hampered US west coast port operations over the past few months. Khouri is calling for each alliance to report promptly to the commission on information and operational steps each is taking to mitigate congestion issues at US ports.

Further, he is calling for updates to be temporarily included in the alliances’ quarterly reports as currently required in each alliance agreement’s periodic reporting requirements. The Commissioner pointed out that under the US Shipping Act, the operation of the alliance agreement will not produce unreasonable reductions in transportation service or unreasonable increases in transportation cost. He admitted there were several factors behind the congestion, but added that loading Asian ports have significantly increased the homogenous mix of the various alliance members’ containers on each alliance vessel.

As a result, a significant number of containers now need additional intra-facility ground moves among each of the local terminals operated by the individual alliance members before the container is dispatched out of the port complex.

Khouri said, “In terms of overall costs and service levels in the liner supply chain as experienced by US exporters and importers, there has been a deterioration in service and significant increase in costs due to several factors. We have received private reports and seen numerous press accounts that the operations of the four alliances – G6 CKYHE, Ocean Three and 2M – may be a contributing factor in the chronic congestion at the west coast ports and perhaps at other port facilities. Other factors also playing significant roles in port congestion include issues surrounding labour, chassis and Drayage drivers.”

The arrival of larger vessels resulted in a larger number of containers being discharged in each call and a slowdown in productivity. Khouri’s remarks come as the Global Shippers’ Forum has called for shipping line monitoring of Key Performance Indicators to show how ocean shipping alliances deliver tangible benefits in terms of reduced costs, competitive ocean rates and improved services for shippers.

Price-fixing ship executive gets jail sentence

An employee of a Japan based shipping company has pleaded guilty and was sentenced to 15 months in a US prison for his involvement 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 US and elsewhere, the US Department of Justice (DoJ) has revealed. “Today’s sentence is another step toward bringing to justice the perpetrators of this long running cartel and restoring competition to the ocean shipping industry,” said Bill Baer, Assistant Attorney General for the Antitrust Division.

“But this investigation is far from over. We are continuing our efforts to hold accountable the companies and executives who seek to maximise profits through illegal, anticompetitive means.”

Pursuant to the plea agreement, which the court accepted, the employee was sentenced to serve a 15 month prison term and pay a $ 20,000 criminal fine for his participation in the conspiracy. The employee was charged with a violation of the Sherman Act, which carries a maximum sentence of 10 years in prison and a $ 1 million criminal fine for an individual. The maximum fine may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

(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).)