Asia-Europe, what does the future hold on this extremely volatile trade lane for carriers, forwarders and cargo owners?
Supply and demand
Arguably since the Far East freight conference was disbanded back in 2008 the market has been in turmoil, not helped by the global economic slump in 2009.
Many carriers looked to cut internal cost and targeted their fleet, choosing a path of investment into newer and larger vessels. The goal: to be more fuel efficient coupled with the economies of scale needed to reduce overall slot cost. Vessels which were once considered some of the largest available (13-14,000 TEU on average) have now been overtaken by vessels over 20,000 TEU. You only have to look at the likes of the MSC Oscar & CSCL Globe recently introduced on the trade.
The result, a surge in new vessels not supported by the level of demand needed which has led to chronic overcapacity on the key Asia / Europe trade lane. With carriers looking to achieve above 90% in terms of utilisation it has left many with little option but to focus on rate to attract and maintain their market share.
The effects of this overcapacity reached a peak towards the back end of 2015 as carriers engaged in a fierce war on price which saw spot rates crash to all-time low this time last year.
A market on its knees
As carriers entered negotiation on 12 month contracts the spot market was literally on its knees and rates being agreed were well below levels needed by carriers to make a profit. Many of the bigger lines looked to secure market share at any cost, the feeling being that perhaps some of the smaller players may have struggled to keep pace.
As a result, the poor end to 2015 was carried into 2016 and from March through to June spot rates for HC containers fell as low as $150 – $200, a record low for the trade. Not much to pay to get a 40’ container from the other side of the world, certainly not sustainable for the carriers.
In fact, financial returns up until the end of the 3rd QTR in 2016 have not made for good reading across the board. This was highlighted by Maersk, the world’s biggest container line, having posted a $230 million loss for the first nine months of 2016.
How can we reduce the impact of overcapacity?
Thankfully there does appear to be an end in sight. Current order books are pretty much empty, and, despite around 1.7 million TEU being due to come on stream in 2017, after that there is little to report.
Carriers have been trying extremely hard to ‘stop the rot’ and reverse the trend of spot-rate decline. They have increasingly looked to vessel omissions and blank sailings, often with little or no warning, to soak up the capacity. This has led to frustration amongst shippers and disruption across the supply chain with many asking for a different solution.
Added to this, scrappage rates are at their highest with a reported 300,000 TEU being demolished to date and the estimate for the year-end puts this figure at a total of 400,000 TEU. Throw into the mix over 1million TEU of idle capacity and you can see carriers have taken significant strides to try and address the balance in terms of available capacity against demand to strengthen their position in terms of rate especially as they approach key contract negotiation with the high street retailers.
The Hanjin Effect
Still the financial plight of the worlds carriers has been well documented with many making the headlines for the wrong reasons…
This culminated in September this year with the announcement from Korea that Hanjin had filed for bankruptcy. The carrier, having been unable to renegotiate existing financial obligations, had all financial aid from their bank stopped. With the debt standing at $5.4 million the industry was thrown into turmoil with the announcement that the world’s 7th largest container shipping line would be entering liquidation.
Hanjin vessels were arrested in various ports around the world. Many were refused entry with others heading back to Korean waters. In the meantime creditors looked to ring-fence assets as those owed monies by the ailing carrier formed a long and complex queue.
There were a reported 500,000 TEU affected, with a total of $15-$20 Billion in cargo. Samsung in particular were badly affected having around $38 million worth of cargo tied up across two vessels. Felixstowe was said to have a stock pile of 10,000 Hanjin containers which lead to wide spread disruption and confusion at the UK’s busiest container port.
In total there were 8,300 cargo owners caught up in the mess leading to supply chain & production line chaos. Nothing of this scale or magnitude has been seen before in the container shipping industry and the aftershocks will be felt far and wide.
So, will the industry take note and learn? The race to the bottom price-wise is simply not sustainable. Carriers, Forwarders and Cargo owners have all had a part to play in this, but Hanjin’s demise will, and should, serve as a warning. There certainly seems to be a change in behavior from carriers in the early stages of the aftermath. Spot rates are currently as high and as stable as they have been in 2016 and vessels are well utilized with space now coming at a premium, many in the industry already labeling this the ‘Hanjin Effect’.
The new shipping landscape
The current carrier landscape has changed dramatically in recent years, most notably in recent months by the acquisition of APL by CMA; and China Shipping and Coscon coming together to form China Ocean Shipping. Hapag-Lloyd acquiring UASC and only last week came the announcement that the 3 main Japanese carriers in MOL, NYK & Kline will merge, all of which highlight the speed of change in the market.
In fact, recent reports in the trade have suggested by 2020 there may only be 8 carriers left on the main East / West trade as mergers & acquisitions continue to unfold.
Moving into 2017 we will see three key alliances emerge: the 2M, The Ocean Alliance and The Alliance. The 2M, made up of Maersk & MSC will remain at the fore with around 36% of Capacity on Asia / Europe although the possible inclusion of Hyundai would add to this. The Ocean Alliance will take around a 35% market share and is made up of Coscon, Evergreen, CMA, & OOCL. The Alliance will have a bit of sorting out to do given Hanjin was originally part of this but the key players will still be Hapag Lloyd, Yang Ming, NYK, MOL & Kline and should make up around 20% of capacity on the trade.
So what does the future hold? It would appear a corner has been turned from the carrier perspective, and as the new alliances and mergers settle you would think the carrier position is strengthened which should lead to more sustainable pricing.
For cargo owners perhaps: consideration for increased collaboration, for considered carrier and forwarder selection, and a focus on the efficiency and cost saving that can be achieved through strategic partnership and system integration is the future direction to explore.