Mar 23

Expect Shipping Disruptions in April and May Due to the Transitioning within the new Alliances

SHANGHAI — There is mounting concern from shipper groups and forwarders that the new mega alliances launching in just over a week will create significant disruption to their supply chains.

Container lines will be transitioning from the old alliances to the new networks on April 1, but with such a total restructuring of the vessel-sharing agreements (VSA) and the huge number of port pairs involved — 420 on Asia-Europe alone — a smooth rollout is not expected.

“The VSA structures will bring big changes and rough seas are coming in April. As the carriers start to reposition and pull ships out, it is going to cause chaos,” said Ken Sine, vice president of global ocean product at Crane Worldwide Logistics.

The Ocean Alliance, THE Alliance, and the 2M Alliance plus Hyundai Merchant Marine will provide 17 weekly strings between Asia and North Europe, one more than offered by the four existing alliances (2M, G6, CKYE, and O3).

Sunny Ho, executive director of the Hong Kong Shippers’ Council, agreed that disruption was on the cards, with fears that capacity management and manipulation could be a major threat to carrier customers.

“The top four carriers account for 47.7 percent of total capacity. Most other operators are too small to offer real sense of rivalry,” he told delegates at the Intermodal Asia conference in Shanghai. “There is also concern of product diversification, such as port calls, routing, network, and frequency.”

Jessica Zhang, international trade operations for the Shanghai branch of Dow Chemical, said even though the container shipping world was undergoing a major restructuring, shippers’ commitments remained the same.

“Shipping lines are sharing slots in alliances, but even though their operational model has changed, our fundamental need is for them to provide a reliable service. On-time delivery is one of our KPIs [key performance indicators] that we commit to our customers, and we expect that same commitment from the lines,” she said.

Even though the new alliances would redraw the global networks and port calls, Zhang said her needs were straightforward. “We need to make sure we have enough space to fulfill our requirements.”

Chris Welsh, secretary general of the Global Shippers’ Council, said the problem was that in the formulation of the new market structure, the customer was largely absent from the discussion, with the focus on what works for the container lines.

“There is little differentiation in price and service offering by carriers. Shippers are seeing less choice and less competition. We all need to be worried about that,” he said.

Welsh said the Global Shippers’ Council was questioning the entire alliance business model, as in the past the VSAs had failed to provide shippers with the kind of certainty they needed to operate their just-in-time supply chains.

“Previous alliances resulted in uncertainty because of blanked sailings, delays, and port congestion, and there is no reason to believe the new alliances won’t continue to undermine that certainty that shippers require,” he said.

Alan Murphy, CEO of SeaIntel, said disruption would be difficult for the carriers to avoid. “There are three alliances that are reconfiguring, two of them completely new. There are a lot of services that need to move from one set of partners to another set of partners, and it could be sorted out soon or it could take weeks,” he said.

SeaCube Container Leasing chief operating officer Robert Sappio also raised the potential of a shortage in boxes as the new alliances start to operate in April.

“That will take some time to get right and to get in effect for the peak shipping season, and it is possible there could be some inefficiencies as the alliances get used to their new networks and new rotations,” he said. “That may also cause a need for new equipment, at least in the short term.”

As shippers try to make sense of the new alliance networks, Sine warned delegates that maintaining a diversified portfolio of carriers was critical and a shipper or consignee needed to fully understand what they were getting in the new alliances.

“When you contract with a carrier, you need to avoid single sourcing yourself. If an NVOCC [non-vessel operating common carrier] comes with a great offer but doesn’t tell you that their solution is Maersk Line and MSC [Mediterranean Shipping Co.], they have single sourced you and you are not managing your risk,” Sine said.

“And it is all about managing risk as we learned from the Hanjin Shipping bankruptcy. Understand the services you use and know what is involved in the alliances you are using. Understand what you are contracting, but understand that you are not just dealing with a carrier that is moving cargo under a bill of lading for you. You also need to worry about its VSA partners.”

One of the big worries for shippers at the moment is related to carriers shifting vessels around in preparation for the launch of the new alliances and creating serious space shortages for North Europe exports to Asia. It has had the effect of driving up rates on the backhaul route, with CMA CGM just announcing that its freight-all-kinds rate, or FAK, from Rotterdam to China would be $1,400 per 20-foot-equivalent unit (TEU) from April 16.

That is more than $500 per TEU higher than the current headhaul spot rate from Shanghai to North Europe, which is tracked on JOC.com’s Market Data Hub.

Welsh said from a customer point of view, this was totally unacceptable. “Cargo space is being rationed by carriers. It is causing a lot of shippers to consider other alternatives to ocean freight, such as air or rail. There is huge interest in the China-Europe rail because of this,” he said.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.

Mar 03

2017-2018 FCL Rate Contract Forecast Update March 3, 2017

The Megas are Coming: Containers Still Chasing Cargo

While optimism and enthusiasm is a good thing, it could be said that containership carriers may very well have something else coming. There are too many megas coming into service, and this avalanche of empty boxes is threatening to upset the tenuous ocean freight rate gains of the past six months.

March 1 marked the six month anniversary of the Hanjin bankruptcy, whose sudden and brutal death likely saved the box-ship industry from losing 3-5 other carriers.

Hanjin’s filing instantly took 93 ships and some 600,000+ TEU’s off the market.  While not ignoring the horrific financial losses being suffered by Textainer, Danaos, and others due to Hanjin, their bankruptcy stopped what was likely the greatest container rate collapse of all time. Rates immediately skyrocketed, giving the carriers an opportunity to stop the financial bleeding.

While rates have slightly slid since Chinese New Year, they are still almost double those of last summer when the market average price in the Xeneta spot rates index at the end of June stood at $1034 (China Main ports – North Europe Main | 40’ container).

Today (March 3, 2017), the Xeneta spot rates index shows the market average price for a 40’ box from China Main ports – North Europe main ports at $1761, up 252%since the same time last year when the same box was moved on the same corridor at a market average price of $499.

 

Mega Vessels with Overcapacity | What Gives?

During the loom of last year, carriers continued to cancel sailings, re-jiggered their basically ineffective alliances, and scrapped a record amount of containerships – but now it all may come undone as previously contacted megaships begin to arrive. The new vessels threaten to upset the tenuous supply-demand ratio of boxes-to-cargo that was finally beginning to balance.

Just last week MSC received the 19,472 TEU MSC Rifaya, and within the next 30 days will take delivery of two more 19,500 TEU vessels. And where will this almost 60,000 new TEU’s be dropped? Into the already-bloated Asia-North Europe routes. UASC will be be adding to the glut; they have six 18,800 TEU megas (totalling112,800) along with eleven 15,000 (165,000) TEU vessels on order.

That’s 337,800 empty TEU’s arriving into a market that’s already flooded with 1.3 million TEU’s (340 ships) laid-up capacity; with this many empty boxes, can the market still bask in the rally from the past few months? Tighter capacity measureshave indeed been taken by carriers to band aid the challenge as the megas soon invade the scene. Is it enough?

 

Maersk Takes a Pragmatic Approach

Maersk, on the other hand; took a realistic view of the marketplace and pushed their 2017 deliveries of nine 14,000 TEU vessels (126,000) out to 2018-2019. They said they did not have to make any penalty payments to the shipyards, and if volumes improved there were sufficient ships that could quickly be chartered. That’s perhaps some of the common sense thinking others in the industry should also display.

This won’t be easy on the S. Korea and Chinese shipyards, most of whom are already looking at shortened order books and increasing lay-offs. Government assistance will likely be required by the yards, but with 1.6 million TEU’s of new vessel capacity arriving in 2017, another 12-18 months of collapsing rates will surely bring more carrier bankruptcies and turn those temporary layoffs at the yards permanent.

While these are not pleasant decisions to make, the rest of us may be wondering, what’s the point with all the mega ships if they will be sailing empty? There are still too many boxes competing for too little cargo, and until the world economies improve, the carriers need to take a realistic look at the cargo – container relationship and decide accordingly. As I always say, the market remains unpredictable.

Feb 10

Consumer Spending Increases Imports

Source:  www.joc.com

Loaded container imports will increase 4.6 percent in the first half of 2017, a significant year­ over ­year improvement, as retailers balance inventories with demand fueled by buoyant consumer spending, Global Port Tracker forecast Thursday.

The forecast of a 4.6 percent increase in the first six months of the year is about three times as large as the 1.6 percent hike in 2016 over the same period, according to the report, which is produced for the National Retail Federal by consultant Hackett Associates.

“The United States is well placed in 2017 and is likely to outperform most of the rest of the developed economies,” Hackett Associates founder Ben Hackett said. “If the infrastructure investments promised by the new administration come about, we can expect stronger growth than in 2016, but that assumes good relationships with US trading partners and no recourse to trade barriers that would result in a tit­ for ­tat response.”

Cargo volumes will increase by a healthy clip year­over­year in several months at the start of the year, rising 6.6 percent in January, 7.8 percent in March and 8.2 percent in April.

Volumes will decline by 0.6 percent in February, compared to the same month in 2016, but increase by 2.3 percent and 4.3 percent in May and June, the report said.

The NRF forecast is broadly in line with that of Mario O. Moreno, senior economist for IHS Markit, who predicted in January that US containerized imports will expand by 4 to 5 percent in 2017, and reach a new peak of approximately 21.4 million. That was based mainly on expectations of stronger economic growth, with a 2.3 percent increase in GDP in 2017 compared to the 1.6 percent growth in 2016.

Developments in the political arena could lead imports to exceed or fall below the expectations of the Global Port Tracker.

Jonathan Gold, NRF vice president for supply chain and customs policy, said the Global Port Tracker’s forecast was in line with the organization’s expectation of retail sales.

“Retailers try to balance inventories very carefully with demand,” he said. “So, when retailers import more merchandise, that’s a pretty good indicator of what they are expecting to happen with sales.”

An economic forecast for 2017 released Wednesday by the NRF, which represents discount and department stores, home goods and specialty stores, said that retail industry sales will grow between 3.7 percent and 4.2 percent over 2016 figures. Those sales, which don’t include automobiles, gasoline stations and restaurants, took into account job and income growth, along with low debt, that show “the fundamentals are in place,” the report said.

E­commerce sales, which are included in the overall number, are expected to increase between 8 and 12 percent, the forecast said.

Contact Hugh R. Morley at Hugh.Morley@ihsmarkit.com (mailto:Hugh.Morley@ihsmarkit.com) and follow him on Twitter: @HughRMorley_JOC (https://twitter.com/hughrmorley_joc).

Feb 02

2017 Contract Season Update 2017-2-2

Source:  JOC.com

Higher than usual sailing cancellations during Chinese New Year on the trans­Pacific and Asia­Europe trade lanes is the latest example of ocean carrier capacity discipline amid annual contract negotiations.

The deep capacity cuts forecast by SeaIntel come as spot rates on both trades are at least 50 percent higher than those quoted last year a week before Chinese New Year celebrations began on Feb. 7, kicking off a two­week shuttering of Asian factories. Blanked sailings are at their highest level in four years, and although trans­Pacific cuts will be deeper than last year, they won’t be as drastic as they were around the Chinese New Year in 2014 and 2015, SeaIntel Maritime Analysis CEO and partner Alan Murphy told JOC.com.

“Based on patterns of spot rate developments in past years, we are expecting spot rates on Asia­Europe and trans­Pacific to drop 15 percent to 20 percent in the coming weeks, but second­quarter spot rates we estimate to be up 90 percent to 150 percent year­over­year on Asia­Europe and 150 percent to 170 percent year­over­year on Asia to US West Coast,” he said.

Asked about the heavy capacity cuts expected in the next couple of weeks, a spokesperson for Orient Overseas Container Line said: “It is important that carriers constantly keep a close eye on the changes in the market and the performance of their products to ensure they are meeting customers’ requirements.”

The extent to which trans­Pacific and westbound Asia­Europe spot rates hold, or more likely, fall, give shippers insights (http://www.joc.com/maritime­news/trade­lanes/trans­pacific/trans­pac­spot­rates­signal­state­carrier­discipline_20170124.html) into just how much discipline carriers will have in matching capacity to demand, rather than chasing volume at lower rates. The spot rates are taken as a base on which to negotiate contracts.

While the majority of Asia­Europe service contracts are negotiated toward the end of the year, some large shippers are still in talks.

The supply chain director of a global European retailer said, “We negotiate rates from April­March so it gives us the benefit of a few months to see what happens to the market, but suffice to say we’re expecting relatively significant increases over [2016] rates and less choice for us given the consolidation that’s happening in the market place.”

Another Asia­ based global shipper said his company only opened its tender in January and would not know the scale of the increases until early February.

“We are certainly hoping for a price war, but the real market won’t show its face until the other side of Chinese New Year” he said.

Compared with a 10­ week average of pre­Chinese New Year capacity, Asia­ Europe carriers will cut capacity 40 percent in the first week after Chinese New Year, 25 percent in the second week, and 31 percent in the third week, according to SeaIntel.

Asia­ Europe carriers slashed capacity more dramatically in the first week of the Chinese New Year in 2016, reducing space available by nearly 53 percent. Although carriers pulled back in the following two weeks, reducing capacity 20 percent and adding nearly 1 percent, respectively.

On the trans­Pacific, SeaIntel expects carriers to cut nearly 27 percent of capacity in the first week of the Chinese New Year, and then 19 percent in the second week and nearly 4 percent in the third. Those are far sharper cuts then during Chinese New Year in 2016, when capacity shrunk 11 percent in the first week and 18 percent the second, before 2.5 percent more space became available the in third week, according to SeaIntel.

Heading into the Chinese New Year, trans­Pacific spot rates measured by the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index to the West and East Coasts are 77 percent and 55 percent higher than the week before the lunar celebration last year, respectively. The current spot rates to move a 40­foot­equivalent unit from Asia to the US East and West Coasts are both higher than many of the 2017­2018 contracts carriers are trying to secure from major retail BCOs.

The rate to the West Coast is $2,167 and the East Coast rate is $3,647, while carriers are seeking to lock down annual contracts, which generally run from May 2017 to May 2018, in the range of $1,600 to $1,800 per FEU to the West Coast and about $2,450 per FEU to the East Coast, according to conversations with carriers, shippers, and consultants.

After some major shippers signed contracts last season for as little as $750 per FEU to the West Coast, contributing to the billions of industry­wide losses in 2016, carriers are putting on the pressure. Some carriers, for example, are asking shippers for rates $100 to $300 higher than what was being shopped around in late December and early January, arguing they can lock down rates now or risk higher costs once they get alliance network details.

The Ocean Alliance has detailed nearly all its port rotations, but THE Alliance hasn’t disclosed specific ports for network placeholders, such as “South China/Hong Kong,” “Los Angeles/Long Beach,” and “Caribbean Hub,” according to SeaIntel. The analyst expects the network of the 2M, now with a Hyundai Merchant Marine partnership component, to remain unchanged.

Depending on the relationship with the customer, how the contract is structured, and how much volume is committed, carriers may settle for West Coast rates of $1,000, and $2,300 to the East Coast, a container line executive told JOC.com last week on the condition of anonymity. Still, these are hardly major advances, considering a $1,600 to $1,700 rate was once considered poor, the executive said.

Whether carrier discipline will hold is unknown, but they do have some momentum. The capacity cuts that have been made, and are to continue, have helped prop up spot rates, according to data from Xeneta. The rate management platform looked at the spot rate developments around Chinese New Year 2016 compared with this year and found that on the day before the Chinese holiday began, the market average spot rate in 2017 was almost double that of 2016.

On the Asia­North Europe trade this year, the market average rate the day before Chinese New Year on Jan. 27 was $2,301 per 20­ foot ­equivalent unit compared with $1,057 on the same day the year before. By March 7 in 2016, the market average spot rate had plunged to $695 per FEU.

It was the same picture on the Asia­Mediterranean trade. On Jan. 27 2017, the market average was $2,057 per TEU, while it was $861 per TEU on the same day just before the Chinese New Year in 2016. The spot rate had declined to $504 per TEU by March 7.

Patrik Berglund, Xeneta CEO, said how the short­term market developed after the Chinese New Year would be important. Noting that carriers have shown capacity discipline in the past only to fold later, Berglund told JOC.com that this time around alliances have all trimmed capacity at generally equal levels, boding well for a measured approach — at least in the short term.

“If, as we’ve seen historically, it plummets quickly after that then it might very well rapidly change from a seller’s to a buyer’s market again,” he said. “If it sticks, the shippers sitting on the fence, waiting for Chinese New Year to blow over might have lost out on the opportunity to contract, as they’ve done historically, according to the calendar year for Europe and then, as quickly as possible, for the trans­Pacific corridor.”

Contact Greg Knowler at greg.knowler@ihsmarkit.com

Contact Mark Szakonyi at mark.szakonyi@ihsmarkit.com

Jan 18

New Carrier Enters Trans Pacific Market – SM Line

Source:  JOC.com

SM Line plans to deploy five ships acquired from Hanjin Shipping with capacities of 6,500 twenty-foot-equivalent units on a service connecting China and South Korea to the Port of Long Beach in April.

That will provide an in-house network for the newest trans-Pacific entrant’s sister companies and inject new capacity as the next wave of shipping alliances launches. Executives from the Samra Midas Group, a South Korean-based manufacturing, construction and services conglomerate, told US Federal Maritime Commissioner William Doyle last week that the service will call on Shanghai and Ningbo, China, and Busan South Korea.

SM Line also plans to deploy 11 vessels ranging from 1,000 TEUs to 2,500 TEUs on eight intra-Asia services between China, Japan, Thailand, Vietnam, India, Pakistan, Indonesia, and other countries, Doyle told attendees of a National Retail Federation event in New York on Monday.

In addition to trying to break into a competitive market, SM Line will likely have to rely heavily on non-vessel-operating common carriers for its volume as beneficial cargo owners tend to shy away from new entrants. Shippers are scrutinizing the health of even long-time trans-Pacific carriers after Hanjin Shipping collapsed Aug. 31, leaving hundreds of thousands containers in limbo.

SM Line will set sail without the help of an alliance, which allows partner carriers to better ensure they are operating heavily loaded by pooling their cargo among members on more efficient mega-ships. The lines making up the new alliances — Ocean Alliance, THE Alliance, and 2M + Hyundai Merchant Marine — that launch in April controlled 82.4 percent of Asia imports to the United States in 2016, according to PIERS, a sister product of JOC.com within IHS Markit.

Underscoring the competitiveness of the market, over the last six years at least six container lines — including Hainan POS, Grand China Shipping, and T.S. Lines — have entered the trans-Pacific trade lane only to pull out in 2011 and 2012, according to industry analyst Alphaliner.

The SM Group in November beat out HMM for control of Hanjin’s trans-Pacific and intra-Asia networks. The intra-Asia trade, once an assured source of revenue and profit growth for container lines, has found itself victim to the same forces of overcapacity and weak demand that plague the major east-west trades. Chronic congestion at key ports in the region meanwhile has driven up liner operating costs.

The SM Group has a wide range of commercial interests including steel, aluminum, textile, and chemical production as well as credit and engineering services. The conglomerate is also involved in construction and battery, shipping materials, and beauty products manufacturing. The formation of SM Line is the company’s second endeavor in shipping, having acquired South Korea’s No. 2 bulk carrier Korea Line in 2013.

Nov 01

Import Container Rate Market Analysis – October 2016

Source for below data:  Drewry UK October 2016

  1. Review of Spot Rate Trends; Supply and Demand Trends

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2.  Review of New Orders of Containers

screen-shot-2016-11-01-at-8-44-29-am

3.  Contract Rate Forecast

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4.  Contract Rate Trend Review:

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Oct 02

Assessing Health of Carriers – September 27, 2016

www.joc.com

Shippers are being urged to have a good look at the financial situation of carriers before committing their cargo, but that is going to be a complicated procedure once the new alliances are in operation from April 2017.

Even if a shipper selects a healthy carrier, few members of those three alliances — 2M, Ocean, and THE Alliance — are in good shape, and there is no guarantee containers will travel only on a particular carrier.

The Drewry Z score index of publicly listed carriers shows the top five shipping companies are safe from bankruptcy, but those five lines are spread across the three alliances that kick off next year. For instance, Ocean Alliance member Orient Overseas International Ltd, the parent of Orient Overseas Container Line, is at the top of the list based on its 2015 annual results. CMA CGM is at No. 3 with a slightly negative first-quarter earnings before interest and taxes, but the financials of the other two partners, Evergreen Line and China Cosco Shipping Lines, are not very pretty.

Evergreen’s EBIT for the quarter ending March 31 was a negative $131 million, while China Cosco Shipping in August recorded a first-half loss of $1.08 billion. Much of the Chinese line’s losses are from its bulk shipping sector and the absence of government subsidies in the first half for the early scrapping of ships.

THE Alliance lines also have some impressive losses among them. Hapag-Lloyd’s first-half loss was $159 million, while the three Japanese lines’ financial year ending March 31 saw MOL with a $1.5 billion loss, “K” Line with a loss of $470 million and NYK Line the only one in profit at $166 million. Yang Ming’s first-quarter net loss was $116 million. Hanjin Shipping was to be member number six until its banks walked away.

If the 2M Alliance does end up including Hyundai Merchant Marine, it will have a loss-maker for a partner with a sizeable amount on debt on its books. Maersk Line itself made a $151 million loss in the first half.

Drewry expects container lines to lose between $5 billion and $10 billion this year as freight rates remain low amid surplus capacity and weak demand.

“With so much uncertainty shippers will probably look to hedge their bets with the alliances at the beginning and see which one works best for them in the long-term,” according to the analyst’s Container Insight Weekly.

Drewry said the uncertainty over what the industry will look like is “less than ideal” as shippers prepare tenders for shipping contracts. “None want a repeat of the Hanjin situation with billions of dollars’ worth of cargo stranded outside ports and they will want to know in advance which carriers will be sharing ships to avoid those that they consider to be financially risky,” it noted.

But John McCauley, vice president of transportation and logistics at Cargill, said at a recent conference that if financial health was the only criteria used by shippers when choosing their carrier partners, no one would be shipping anything.

“Many shippers are having to reassess their tactics,” he said. “Do we go by carrier or by alliance? That is important so we can keep a balance of the service requirements we need and the ships that are going to deliver our products.

“There is sufficient competition between carriers to ensure we have enough choice. We look at the financial strength of an organization, their ability to invest, the quality of customer service. Price shouldn’t be the sole determinant,” he said.

“Like everyone, we will refine and look at our carrier selection process. The other soul searching will be less about the sourcing and more about how Hanjin was managed.”

McCauley said the collapse of the South Korean carrier had shocked the industry. “Hindsight is great, but when you look at the extent of business affected — $14 billion of business impeded and in some cases thrown into the toilet — and ask if the industry could have managed it better? With the inability of any individual customer to influence what is going on, I am not sure it could have.”

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.