Plunging rates threaten profits at shipping lines

Shipping lines are on the brink of losing money on their Asia-Europe trade routes now that rates have fallen to a 10-year low - the result of the credit crunch that has reduced European demand for goods.

As trouble at European banks surfaced, overseas buyers reined in their purchases of Asian goods as the cost to finance shipments inflated. At the same time, suppliers in Asia have become more prudent in exporting cargo out of concern that importers might fail to honour their payments as credit markets dry up.

The abrupt decrease in the volume of shipments between Asia and Europe prompted shipping lines to cut rates so they could fill the added capacity created when they diverted ships to this route from the transpacific route, which had shown signs of an economic downturn last year.

Freight rates on the Asia-Europe route dropped to US$350 per 20-foot equivalent unit (teu) this month, down 61 per cent from US$900 a year earlier. The utilisation rate of vessels has fallen to as low as 70 per cent, compared with more than 90 per cent last year.

'There is not much more downside on the rates, as the shipping lines can barely break even at existing rates,' said Huang Xiaowen, the managing director of China Shipping Container Lines.

The upcoming dissolution of the shipping lines' rate-setting body, the Far East Freight Conference, would also complicate communication between shipping lines on stabilising freight rates, Mr Huang said.

On October 18, the European Union's competition law, which prohibits price fixing, will go into effect for shipping lines.

The pricing of Asia-Europe trade would become more volatile as exporters negotiate shorter-term contracts with the lines amid softening freight rates, said Sunny Ho, an executive director of the Hong Kong Shippers' Council.

Unlike the transpacific trade lane, which is bound by contracted rates negotiated once a year, freight rates on the European trade are normally negotiated every three months. Mr Ho said some exporters negotiated terms every month.

Shipping lines are levying on exporters a bunker adjustment factor and a currency adjustment factor on top of freight rates.

Both factors have become the major revenue stream for shipping lines as freight rates drop. For example, the bunker adjustment factor on Europe trade still ranges from US$720 to US$780 per teu.

However, that factor would also be negotiable after the dissolution of the trade body, which would prompt all-in freight rates to fall after October 18, Mr Ho said.

The current fall in freight rates reminds liners of the meltdown in the market in 1999, when the industry was plagued by severe overcapacity.

However, new vessels are now much larger, so the unit cost per teu is lower, making shipping lines more resilient to adverse market conditions.

Cheaper freight

Falling demand has seen rates slashed on Asia-Europe route

Freight rates on the Asia-Europe route have dropped from a year earlier by: 61%