Liner strategy a risk to profits – Bimco

11/12/2017

Container shipping lines must carefully manage capacity across their networks if they are to prevent freight rates declining further and limit financial losses over the winter season, according to the latest analysis from Bimco.

Peter Sand, chief shipping analyst at association Bimco, questioned why average freight rates had fallen while volumes had grown at healthy levels throughout the Q3 peak season, buoyed by strong US and European import demand for much of the year.

This saw European imported volumes grow by 4% to reach 21.2m TEU over the first eight months of year, according to Container Trade Statistics. Volumes on the Far East to Europe trades expanded 5.4% over the period and accounted for a little more than half of all European TEU imports.

“Head-haul transatlantic from Europe to North America grew as much as 7.9%,” said Sand, who added that global container traffic expanded by 5%, year on year, in the first eight months of 2017.

However, despite strong demand growth, Sand noted that average spot rates for US and Europe-bound routes dropped more than 20% from the end of July through late October.

“With demand growing briskly, why were spot freight rates falling significantly on all those trades?” he said. “Because of the liner companies’ interest in ‘testing’ the strength of the market, they deployed tonnage into the trades until the freight rates dropped.

Only by doing that, could they reveal the true strength of demand.”

Illustrating his point, Sand said that despite lines running regular service cuts around Chinese Golden week in early October, an event which brings down demand, freight rates had kept falling due to excess capacity.

“During the months of May through to September, we have seen the idle fleet drop further to reach 495,000 TEU by 2 October 2017,” he added. “Now that we are entering the winter season where the transported volumes always go down from Q3, the management of deployed capacity on individual trades and throughout the entire network will be essential to limit losses.

“The start of November has brought back slightly higher freight rates. Time will tell if cuts in deployed capacity across the network can stem the impact of lower demand in coming months.”

He concluded that although lines had seen profits returning on several trades, the market remained “very challenging” with many trades still delivering loss-making freight rate levels.

“The fragile recovery needs assistance and some caretaking,” he added. “Overcapacity will remain an industry challenge for years to come and keeping sailing speeds at present levels will be critical for the recovery to stay on track.

“For the coming months, volumes will decline seasonally until February. During that period, however, the fleet is expected to continue growing. Handling this will also be a recurring seasonal challenge…and striking the right balance must be a priority to stop declining profits.