Trying times
To lay up or not to lay up? To slow steam or not to slow steam? To suspend a service or not to suspend?
These Shakespearean dilemmas buffeted liner executives throughout 2008, a year that saw more dips and turns than a roller coaster. Just to quickly recap, the transpacific trade went from stagnant to 'in decline' and the Far East/Europe trade went from bonanza to bust.
It's no use forecasting anymore when things will pick up, but there seem to be two general schools of thought as to when volumes will rebound:
' We are nowhere near bottoming out, that 2009 will purely and simply be a year of pain.
' Things will be better by mid-2009, when shippers who have been shy to place purchase orders these past few months will see inventories dwindle to nothing.
Which theory you believe probably says a lot about whether you're a glass half-full or half-empty type of person. Or more appropriately, ship and store half-full or half-empty.
In any case, several factors are at work. First and foremost, North American demand for Chinese goods dropped precipitously in 2008, and especially in the second half of the year.
One needs only to look at the Yantian Container Terminal in the Port of Shenzhen to see how moribund growth in Chinese exports to the United States have been.
Volume through Yantian dropped 6 percent in the first half of the year – and that was before the economic crisis fully took hold. Yantian, which doesn't release month-by-month volume statistics, is a significant barometer because it overwhelmingly handles originating export cargo, and 70 percent of its services are transpacific.
It should be noted that the numbers are poor only in the context of unbridled growth that's occurred through much of the last decade. No matter what people expected, transpacific container trade could never possibly sustain double-digit (or even 7 percent) growth forever. That the economic crisis was the catalyst for the drop in volumes is but a detail.
So how are carriers dealing with the slowdown, and what will they do in the coming months? Lay-ups, matching supply and demand, optimizing fleets. Whatever you want to call it, the trend that started a year ago has become even more pronounced this year.
The demand slowdown has been matched by a simultaneous falling of rates. All the ships that were due to come online this year, next year and in 2010 – the ones that many carriers said wouldn't cause overcapacity – have indeed helped to cause overcapacity. True, it took a catastrophic economic collapse for it to happen, but the overcapacity did carriers no favors.
So dozens of ships – some fairly new and really large – will sit out the winter and early spring as carriers wait for demand to pick back up. Everyone from Maersk to APL to the CKYH Alliance – COSCO, 'K' Line, Yang Ming and Hanjin – made capacity withdrawal announcements in the fall. AXS-Alphaliner reported that between August and early December, carriers had shaved 5.5 percent of transpacific capacity.
'We have seen lines making adjustments in recent months, and there will still be adjustments made in the months to come,' said James Chen, Asia Pacific trade and transportation manager for Nike. 'Had carriers not made capacity reductions, the rates would have come down significantly. Carriers will have to work together. (That they're cutting services and sharing slots on transpacific services) is a sign to me that the lines are working together to get through this downturn.'
Another interesting trend that propped up in 2008 was slow steaming, as a way to reduce fuel costs while bunker prices went through the roof. Now that the price of crude is less than it was before hitting the roof, will carriers continue to slow steam? It does provide a way for them to employ ships that would otherwise be idled.
Idling ships is not a cost-free endeavor. By some estimates, it costs a carrier $40,000 a day to idle a chartered 4,000-TEU vessel. As long as the extra capacity in a string isn't hurting rates, it could also be used to benefit shippers.
Emirates Shipping Line executives told American Shipper that adding a ninth vessel to an eight-vessel string effectively adds 12 percent of on-the-water inventory for major shippers. That frees up capital for shippers and allows them to have a more continuous supply of goods in the pipeline. Now whether there are enough consumers to buy all those goods is another issue.
But it should be noted that slow steaming has not really been a factor on the transpacific like it has between Asia and Europe.
'Slow steaming has had little impact in the transpacific markets,' said John Lauer, director of transpacific services for Matson. 'It has been used in Asia to Europe, but we haven't seen any significant impact to our trade.'
Lauer said certain transpacific shippers 'continue to believe there is a value to fast transits,' with inventory management depending on speed and reliability.
Any report on the transpacific can't leave out developments in the Far East/Europe trade. That's because the two have become inextricably linked as larger vessels are deployed by the dozen or so truly global carriers. In the most recent boom times, mega-ships entering into the Far East/Europe pushed slightly smaller, but still pretty big ships into the transpacific.
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| Heaney_Simon Drewry Shipping Consultants |
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| 'It's very difficult to be positive about the prospects for container shipping in the current economic climate. ' | |
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When the transpacific faded in the second half of 2007, carriers shifted excess capacity back to the Far East/Europe. But that free-for-all was never going to last very long. Now that capacity is being cut on both lanes, there doesn't seem to be any other trade with enough mass to vacuum up the excess.
'It's very difficult to be positive about the prospects for container shipping in the current economic climate,' said Simon Heaney of Drewry Shipping Consultants. 'The transpacific trade, of all the major east/west trades, entered this period of turbulence from an already weak point and Drewry sees no reason to expect 2009 to be significantly better.
'The demand slowdown and lower fuel surcharges are pushing down all-in freight rates in most U.S. container trades, and unsurprisingly carriers are reacting by shedding capacity. These winter retrenchments are not new, but what is different this time round is the lack of cascading options with virtually all routes suffering from the same demand slough. Just how many transpacific ships are parked up – and how long they remain inactive – will serve as a useful barometer for the U.S. economy as a whole in 2009,' Heaney said.
Drewry is projecting a 3.9 percent drop in transpacific eastbound volume in 2008, to 13.9 million TEUs. The forecast for 2009 is 1.9 percent growth.
'However, that forecast was made in September and now looks to be on the high side and is more likely to be zero or worse,' Heaney said.
That sentiment was bolstered by Charles de Trenck, founder of Hong Kong-based Transport Trackers, who said at a conference in early December to plan on zero growth in all major trades and hope for the best in 2009.
As for the rate outlook next year, Drewry predicts carriers will keep at their goal of recovering more costs.
'Despite the recent drop in bunker prices carriers are unlikely to let up in their efforts at recouping a greater share of fuel surcharges from shippers, especially for U.S. inland,' Heaney said. 'Ocean carriers must look enviously at the big U.S. railroads, which are far more adept at collecting surcharges, and as a result have been able to increase intermodal prices despite lower volumes.'
Containerization International, in a November analysis of freight rates, said it expects ship utilization levels on the eastbound transpacific to fall from 86 percent currently to 83 percent in the first half of 2009.
That's not 'disastrous,' CI said, but 'they are a far cry from what ocean carriers have been used to since 2002, when China first exploded on to the international trading scene.' The load factors are also lower than what the Transpacific Stabilization Agreement has been forecasting.
'The falling rates suggest that carriers still place considerable emphasis on market share and full ships, with the whole situation exacerbated by non-vessel operators and logistics agents 'cleverly playing carriers off against each other,' ' Lloyd's List reported in November.