Freight rates set to sink again as capacity rises
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Moves by container shipping companies such as Orient Overseas Container Line to boost revenues on transpacific services between Asia and North America could be derailed by an increase in shipping capacity that would depress freight rates.
Freight rates from Asia to the US have risen by about 30 per cent since the beginning of this year as shipping lines imposed a series of general rate increases on container shipments. But plans to impose further rate increases and surcharges due to be introduced in the coming weeks could be jeopardised, feel experts.
The current spot rate to ship a 40ft container from Asia to the US west coast is about US$2,300, Simon Heaney, from Drewry Shipping Consultants, told the Journal of Commerce container shipping conference. While this was higher than the year-long contract rate of US$1,800 agreed in recent weeks between shipping lines and cargo owners, it was still flat compared with rates a year ago.
Container rate increases between January and April have put the level of box rates back to where they were before rates collapsed in the second half of last year. While the increases have put additional cost pressure on cargo owners and exporters, freight rates are still below where they need to be to return carriers to profitability.
Heaney said: 'Part of the reason why I suspect carriers had early rate success was that they were more proactive in cutting capacity.'
This reduction in the number of container ships coincided with relatively strong demand from exporters. As a result there was no pressure on shipping lines to cut rates to fill their ships.
But in the past few weeks, carriers have put idled ships back into service while also increasing freight rates. Heaney said not only had this put pressure on the balance between container ship supply and cargo demand, but it would be a lot harder for carriers to maintain pricing discipline. Cargo owners would push for discounts on rates or refuse to pay the new, higher rate levels.
Tim Smith, chief executive of North Asia for Maersk Line, the world's biggest container line, said: 'The latest round of general rate increases were not as successful as expected.'
He added that a lot of the benefit of the rate increases had been eroded by higher fuel costs, which had risen 65 per cent since August 2010.
Heaney said he thought 'spot rates would stay where they are or fall back' in the coming weeks and 'carriers' resolve (to maintain high freight rates) might weaken'.
OOCL, the Tung-family-controlled container shipping company, saw a 3.4 per cent rise to 306,571 teu (20ft equivalent units) in container volumes on the transpacific route in the first quarter. But revenue on the route dropped 4.4 per cent to US$452.6 million as margins were squeezed. By comparison, Cosco Container Lines saw a 21.1 per cent increase in volumes to 409,267 teu between January and March, but revenue only rose 8.9 per cent to 2.81 billion yuan.
Collectively, box lines are estimated to have lost US$800 million on transpacific services last year, while the Asia-North America trade accounted for about 10 per cent of the global deep-sea container shipping market.
The Transpacific Stabilisation Agreement, an association of 15 container lines, including OOCL and Coscon, that carry 85-90 per cent of eastbound containerised cargo, announced plans a month ago to recommend a US$600 per 40ft container peak-season surcharge on freight rates from June 10.
While Coscon has confirmed it plans to levy container surcharges from Sunday, other carriers have yet to announce their own surcharges.
Lars Jensen, chief executive of maritime consultant SeaIntel, doubts if carriers would be successful in getting the full peak season surcharge.
And Peter Tirschwell from the Journal of Commerce asked: 'Will there really be a peak season?'
The amount, collectively, that box lines are estimated to have lost on transpacific services last year