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Industry faces test of resolve

Industry faces test of resolve

The warning comes in the latest Drewry Container Forecaster report following the considerably higher Asia-North Europe trade spot rates revealed in the weekly rate indices. This position follows the extremely low freight rates seen at the end of last year.

However, the report forecasts that east-west freight rates, including fuel, will rise by as much 13.7% this year but says that from an industry perspective, it is clear these higher rates will enable ocean carriers to cover rising costs and turn a profit.

It also highlights that demand is by no means certain and, as a result, Drewry’s has downgraded its 2012 global forecast to 4.6%, largely on the basis of a weak Eurozone, crippled by debt.

Ocean carriers successfully implemented GRIs on both the headhaul Asia to Europe and Asia to US trades in March, which lifted spot rates above or at least close to the respective trade route break even margins. The report noted that until very recently, even the largest 15,500 teu vessels operating on the Asia-North Europe trade were not making money.

Drewry believes that the industry lost at least US$6.5bn in 2011, in a year that saw global demand growth of 7.4%, stating that this “was very much a missed opportunity for carriers to build on their surprisingly strong recovery in 2010”. As a result, carriers will take some time to make up for this lost ground, rather than moving forward, with the prospects that Q1-2012 financial results will be weak. The position is expected to improve as the year progresses.

The report said that recent losses and high fuel prices forced the industry to restructure, with many carriers grouping together on the core Asia-Europe trade to pool their largest ships into fewer services and sharing costs. ‘This was unlikely to have happened several years ago, but has been forced out of necessity’, states the Drewry.

According to Neil Dekker, head of Drewry’s container research, nobody saw the huge US$800 per teu rate increases coming on the Asia-Europe trade, the timing of which ‘bemused virtually everyone’. Few believed it would be successful, but carriers have stood firm during a period when load factors have not necessarily been in the high 90’s on the headhaul leg.

He goes on to say that it seems the recovery into profit is very much dependent on the carriers’ resolve to maintain the GRIs and little else, since the industry has resolutely refused to put significant tonnage into lay-up. This year will see another 59 ships of at least 10,000 teu enter the global fleet.

“Until the inherent structural capacity is truly tackled, we will continue to have periodic and violent bouts of overcapacity that will keep rates and operating margins yo-yoing up and down,” said Dekker.

“It seems evident that carriers do not truly see the severity of their situation since the number of ships in actual full term lay-up is fairly small. As of early March, the idle or inactive fleet had grown to around 5.4% of total global capacity, but only 47 vessels above 5,000 teu were included in this figure and a number of these are being re-deployed on new services.”

Five new services are being launched in the transpacific before June and Drewry believe this will put continued pressure on the spot rates and the ability for carriers to push through the significant increases they are seeking in the current May contract negotiations.

“Given that Asia-US demand is still uncertain, this desire to re-introduce so much new capacity, rather than lay-up tonnage, could be a de-railer if there is a weak peak season. The cascading of larger vessels into the North-South trades is also becoming more noticeable and could also be a threat to their stability,” suggests Dekker.

“This is only stage-one in the recovery process and how 2012 pans out will be very much dependent on carriers’ commercial behaviour and their strategy for laying up ships as well as the relative health of the industry fundamentals,” he concluded.