[251210.EN.SEA] Will Carriers Recreate The Success Of This Year’s Rate Hikes In 2011 ?

FREIGHT rates saw a recovery in January this year. Will we see a repeat performance this coming January? Some industry analysts have recently commented that freight rate hikes seem unlikely to happen soon, but some leading carriers, seeing the potential surge in demand at the outset of next year, do expect the same early rate spike will reoccur this time around also.  The world's three largest shipping lines have announced freight rate increments. Maersk, the world's largest carrier, has announced that the freight rates for Asia-Central America and west coast South America trade lanes will be increased from US$250 to $300 per TEU starting January. Likewise, Mediterranean Shipping Company (MSC), the second largest carrier, is going to raise rates on various trades with effect from January 1.  The suggested increases are $280 per TEU, as well as $400 per FEU and 40-foot high cube containers for trades between Asia and the Caribbean, Central America East Coast, Cartagena, Panama and Venezuela. CMA CGM has announced rate increases from January 1. Its Asia-North America freight rates will increase by $320 per TEU, $400 per FEU, $450 per 40-foot high cube or reefer and $510 per 45-footer. Rates between West Africa and the Far East, as well as between west Asia and India, will raise $100 per TEU. For Asia-Europe trade lanes, rate increases announced by carriers are between $500 and $600 per FEU.  Also, the US Transportation Security Administration (TSA) has announced a $400 per FEU guideline rate hike for the 2011-12 transpacific contract season, according to Paris-based maritime agency Alphaliner. However, according to statistics from the Shanghai Shipping Exchange (SSE), freight rates from China have been shrinking in the past five months. The spot rates have declined by 29 per cent after reaching its pinnacle in July. Alphaliner analysed that the two key factors - capacity and inventory levels - that led to freight rate increases last year are not seen now, implying that the proposed rate hikes will not succeed this time. Carriers are reported to be reluctant to reduce capacity in the current winter period and some even continue to add new capacity despite the moderate utlisation levels. Inventory levels have also reached a new record high in the US in November as the peak season was pushed forward this year because shippers ordered the goods earlier than usual. Alpahliner further pointed out that weekly capacity on the Far East-Europe and Far East-North America routes is now 19 per cent higher than 12 months ago. Barring further capacity cuts, said a Alphaliner report, there will be sufficient capacity in forthcoming January when shippers rush to move goods before Chinese New Year holidays that start the first week of February.   Also, its statistics showed that the idled box fleet stood at 147 containerships with a combined capacity of 356,000 TEU as of 6 Dec 2010, up 2.5 per cent from 142 ships for 336,000 TEU a fortnight ago. However, the figures indicated that there was an obvious improvement from a peak of 1.52 million TEU idle capacity a year ago. "Nevertheless, our analysis suggests that much of the volume strength seen during May-August was caused by abnormally high movements of empty containers," reported London's International Freighting Weekly, citing a Macquarie report.  This suggests that the so-called better-than-expected cargo volume figures in second and third quarters were somewhat exaggerated and did not reflect the whole picture of global sea freight. If empty containers are excluded in calculation, third-quarter volume only grew two per cent compared to the second quarter, much lower than expected, said International Freighting Weekly (IFW). "Rates have declined over 22 weeks, as has demand," warned Arthur Worsley, a Freight Investor Services (FIS) container derivatives broker.  The risk of oversupply remained "palpable" and it would only take the actions of one line to send the entire market into a price war, IFW reported.   The US stock levels reached a new 20-year high in November as stock replenishment appears to have reached the highest point. "No significant surge in cargo volumes is expected in late December. This could hit carriers' plans for rate increases in 2011," said Alphaliner. But the newly released US Commerce Department figures show that wholesale inventories in October rose 1.9 per cent, while sales grew 2.2 per cent in October, both better than initially estimated. This implies that companies may be growing confident about the prospects for demand.  The October US retail same-store sales figures were up 1.6 per cent, according to Thomson Reuters, which rose more than estimated and showed "signs of momentum in the economy before the end of the year," said Bloomberg.  "The inventory cycle is maintaining its solid momentum," said Joshua Shapiro, chief US economist at MFR Inc in New York, citing Bloomberg. "With final demand showing more signs of life, it will build on itself. It means better output but also maybe more imports."  Analysts at Macquaire Research and Goldman Sachs looked at the issue from another angle. After analysing the relationship between shipbuilding and growth in container volumes, they have come out with a projection that there would be a shortage of containership capacity in 2012, because the construction and delivery of vessels usually lag behind the forecast growth in container volumes, reported Journal of Commerce. Indeed, more transpacific capacity is expected in 2011. The CKYH Alliance, comprising Cosco, "K" Line, Yang Ming and Hanjin Shipping, as well as Hainan PO and TS Lines have announced separate plans to launch transpacific services next year, according to Alphaliner. If Macquaire Research and Goldman Sachs' estimate is correct, the potential threat of overcapacity will not happen and rate hikes will be expected. Nonetheless, the drawback of this analysis is that it overlooked the influence of global economic performance over the demand for boxship capacity. A recent China Export Container Transport Market Report published by Shanghai Shipping Exchange (SSE) said that "no signs of recovery could be perceived in the American economy." According to the figures of the US Federal Reserve on the November 23, the US economic growth rate had been down to 2.4-2.5 per cent from 3-3.5 per cent estimated in June.  "Besides, the excessive money supply engendered by the US outperformed quantitative currency easing policy may evoke a global inflation, whose negative social effect would be increasingly evident in the next few months and bring a lot of uncertainties to the China's export containerised transport," said the SSE report. Adversely, most EU countries are at present beset with severe debt crisis, so they are no better than the US about the economic uncertainties. If the rebound is not sustainable, overcapacity may trigger market share competition and rate war. Therefore, unless carriers maintain "discipline" and make best endeavours to balance the supply and demand, "a rate war is likely to ensue," our sister publication Hong Kong Shipping Gazettewas quoted as saying. Source : CSM, 14.12.10.