Cut capacity if you want rate hikes, lines told

10/3/2012

Market analysts are warning that carriers have little chance of pushing through proposed increases in Asia-Europe container shipping spot rates next month unless they are accompanied by sizeable cuts in capacity.

Maersk Line CEO Nils Andersen said recently the Danish giant was planning another round of “slow-steaming” measures.
 
He did not reveal the scale of the capacity reduction, but at the start of the year, Maersk cut capacity by 9% on its Asia-Europe routes, mainly through slow-steaming, to support higher rates.
 
The company is also planning to raise rates by the the equivalent of US$500 per teu on its Asia-Europe routes on 1 November.
 
Broker ACM/GFI said other carriers had announced similar increases.
 
It said: “The problem that carriers face now is that supply still outweighs demand. In order to make a rate increase stick this time around,  there needs to be a significant withdrawal of capacity by some of the bigger carriers. Maersk needs to make-good the second part of their promise." 
 
Lars Jensen, CEO at SeaIntel Maritime Analysis, estimates that Maersk will probably pull between 8-10% of its capacity. 
 
He said: “The G6 and CKYH [alliances] have already announced a pull-back of a string each. However, we would need to see additional capacity pulled if the market is to be brought firmly into balance.”
 
Jensen said raising rates in November is crucial for carriers, in terms of setting the stage for negotiating new annual contracts for 2013. 
 
“Last year, the carriers were caught out, agreeing annual contracts when the market bottomed-out. They have to raise rates successfully in November to avoid a similar scenario.”
 
Martin Dixon, Research Manager, Freight Rate Benchmarking, at shipping consultant Drewry, underlined that if carriers are to be successful in raising annual contract rates back to profitable levels, they will have to steady the spot market with capacity reductions.
 
“What happens to rates depends on how much capacity is removed and when. The most likely scenario is that these measures will serve to stabilise rather than increase overall rate levels and this will be no mean feat given the rate of decline over the past two months.”
 
Since the beginning of August, Asia-Europe some spot rates have fallen by over 35%. 

“We do not believe this to be symptomatic of a rates war of the kind witnessed through 2011, but rather a consequence of excess supply over demand," Dixon added.