In the never-ending struggle for advantage between shippers and ocean carriers, the latter appear to have the upper hand for the moment.
For extended periods over the last decade or more, major container lines have struggled to keep freight rates at profitable levels. Time and again, their attempts to raise rates have been frustrated by the ability of powerful shippers to extract discounts from favored carriers. The reason was simple: too much vessel capacity chasing too little cargo.
More recently, with the U.S. economy operating at near-record strength, the balance of power has shifted. Demand for ship space is high, giving carriers little incentive to cave in to shippers’ demands for bargains. In December of 2018, vessel utilization in the eastbound transpacific trade topped 90 percent (although it fell as low as 65 percent at mid-year).
The eastbound market grew by 4.7 percent last year, according to Uffe Ostergaard, president of North America with Hapag-Lloyd (America). “The transpacific trade saw healthy economic indicators in 2018,” he said. And it remains strong today.
Contrary to years when carriers where flooding the market with new capacity, often in the form of bigger ships, the supply side today is relatively stable. The cancellation of three weekly services from Asia to the West Coast in mid-2018 removed a significant amount of capacity from the trades, and no carrier has rushed to replace it.
The picture isn’t entirely rosy for carriers. A slowdown in U.S. imports from China and other parts of Asia this year, triggered in part by tariffs on Chinese goods imposed by the Trump Administration, led lines to cancel 35 sailings in the first quarter. And no new services are expected to be introduced in 2019, Ostergaard said, speaking at TPM 2019 in Long Beach, Calif., the annual conference sponsored by IHS Markit and the Journal of Commerce.
Ostergaard foresees “fairly balanced supply and demand” in 2019. But questions persist, including the long-term impact of tariffs, the potential for infrastructure bottlenecks, and costs to be incurred by carriers in conforming to the International Maritime Organization’s mandate that ships transition to low-sulphur fuels by 2020.
“The era of annual double-digit rate reductions [in the transpacific trade] is probably over,” said Philip Damas, director and operational head of Drewry Supply Chain Advisors. On the contrary, rates are likely to rise in double digits during the next round of contract negotiations. And shippers can expect to pay steep surcharges related to the IMO 2020 mandate.
On some routes, Damas said, carriers are no longer willing to sign contracts with fixed, all-in rates. They want to retain the freedom to raise surcharges in line with their growing fuel costs, and “negotiate rates at which the cargo moves.” That’s bad news for shippers who rely on set contract rates to plan their annual transportation budgets.
At the same time, carriers are rethinking their push for ever-larger containerships. With capacity of up to 19,000 twenty-foot equivalent units (TEUs), these megaships have been sold as the answer to carrier’s high operating costs. They were supposed to yield unprecedented unit economies; instead they have resulted in overcapacity in key trades, and severe limitations on the number of ports able to accommodate them.
“The economies of scale of megaships are flattening out,” Damas declared, with orders for such vessels at their lowest levels in a decade. Even with new ships coming on line, an expected 2.6-percent increase in total capacity will fall short of the projected 5.5-percent rise in demand for the coming year.
Carriers might be pulling back from their commitment to the biggest containerships. Damas questioned whether Hyundai Merchant Marine will end up taking delivery of all 20 of the vessels that it ordered last year — 12 of 23,000 TEUs, and eight of 15,000 TEUs.
Maersk Line has led the industry in the march toward bigger ships, with its Triple E-class vessels exceeding 18,000 TEUs. But Soren Skou, chief executive officer of A.P. Møller Maersk A/S, said at the TPM conference that “we don’t see ourselves building bigger ships than we have today.” New containerships aren’t likely to exceed 20,000 TEUs “for the foreseeable future,” he adds.
For container lines, the future is always cloudy. Neil Glynn, equity research and global transport research coordinator with Credit Suisse, warned carriers against becoming complacent. It’s too soon to determine whether a recent series of consolidations and vessel alliance realignments will yield long-term benefits, he said. What’s more, a downturn in the U.S. and global economies could cause a sharp reversal in carriers’ fortunes.
“The next couple of years will be a very testing period for the container sector,” Glynn said, citing the potential impact of megaships and new alliance strategies. “I think it will be difficult to grow earnings into 2020 as a result.”