April Frenzy: Alliance Changes and Rate Increases

Nelson CabreraGeneral2 Comments

The scope of the existing and anticipated vessel sharing agreements is coming into full view. One of the key consequences for the industry is that carriers are planning rate increases in order to increase their current viability and chances for future growth. Some of the reasons that have been advanced for the General Rate Increases (GRIs) include:

  1. Rate hikes by some companies
  2. The onset of new alliances and partnerships
  3. The closing process for BCO service contracts

To that end, the impact of the GRIs is likely to be very significant in terms of capacity and space allocation. Industry players can expect poor contracting levels, oversupplied trades and new repositioning of vessels. This, in turn, will limit the ability of the rate increases to stick in the long term. Shipping news is always a combination of the good and bad.

Container shipping has been absorbing significant losses for years. However, the sector is showing some signs of revival after a number of deals were signed, a move that went a long way in clarifying a situation that was filled with uncertainty. The intense competition is beginning to affect alternative players such as the Leverkusen Express of the Hapag-Lloyd group. One of the recent solutions that have been adopted is the engagement in better cooperation for purposes of filling ships. That seems to be one of the few remaining avenues for making serious money out of giant vessels.

Route Changes and Port Pairs

Another strand of industry changes relates to changes in routes and port pairs. Of particular interest is the Asia-Europe route and the Asia-USA route. The size of the vessels being deployed is bound to change in order to take into account the fluctuating container sizes and the shipment levels. New deals are coming up with the express intention of reducing the number of lines following the historic bankruptcy of South Korea’s Hanjin.

Not everyone is convinced that it is all bad news. Some executives feel that the shakeup is good for the industry. Almost all of the top 15 lines which are affected by the industry mergers and alliances have experienced some modest decline in freight rates. The Drewry Shipping Consultants report that the average revenue per 40-foot container hovers around $17,000 which is a significant uplift from the low point of $12,000 in April 2016. The fact remains that the industry is dogged by a high number of large capacity ships that are chasing inadequate cargo volumes. This is a problem of oversupply and might lead to falling rates in the long term.

Effect on shippers

The consequences of this trend include the possibility of putting all shipments on a single vessel in order to increase the economies of scale. That might mean fewer sailing days and a greater degree of inconvenience for the businesses that rely on the industry.  On the other hand, the increased handling and volume logistical requirements for a single vessel might mean that there are significant delays in the shipping process. In the worst case scenario, some of the carriers might go the Hanjin way which means that customers will have their goods impounded as part of the resultant bankruptcy process.

Rolf Habben Jansen of Hapag-Lloyd has noted the high levels of ship scrapping that occurred in 2016. As a consequence, Maersk reported a loss of $367 million for the fiscal year 2016. The key is to manage the space and demand appropriately. That is why Jansen predicts that Maersk might enjoy profits in 2017 that are twice the losses it suffered in 2016. He argues that “the industry will be far better off in financial terms within the next 12 to 24 months”.  

That view contradicts the thoughts of Lars Jensen of Sea Intelligence Consulting. He argues that the mismatch between demand to move cargo and the supply of ships is a continuing problem that will dent profits. For example; he points out the fact that even as Hanjin was falling, shipyards were producing larger and larger vessels. This essentially means that there is downward pressure on freight rates. The critical determinant of sustainability will be the extent to which the new alliances and mergers will be able to control their freight rates and vessel orders.

Something has to give and one of the alarming signs is the size of new vessels which are capable of carrying as many as 20,000 units of 20-foot containers. Hapag-Lloyd is in the process of acquiring all the shipping operations that were previously handled by UASC. At the same time, Maersk is also acquiring Hamburg Sud. About 75% of all the major alliances which had dominated the industry went out of fashion on the 31st of March. We are in the new era of The Alliance, Ocean Alliance and 2M Alliance.

Rate Increases

Although the spot rate increases are not universal, they are part of the trend that might give us an insight into what the industry might be like. Korean companies are likely to be key players even as they deal with low demand. It is expected that Daewoo Shipbuilding and Hyundai Heavy might reduce the prices of their ships so as to increase their orders. The resultant over-capacity might mean that aggressive pricing is necessary in order to compete in the wider shipping market. The scarcity of capital investments is yet another reason why some shipping companies may use any opportunity available to increase rates in order to stay afloat.

Simon Heaney of Drewry is less optimistic about the future of the industry. He argues that we should seriously look at the case of SM Line taking over Hanjin’s vessels on the trans-Pacific routes. According to Heaney, the need to price aggressively in a new market will force carriers to drive down freight rates. Ron Widdows (formerly of Neptune Orient Lines) is even more concerned about the number of idle ships that could be reactivated at any moment, hence pushing rates down.

Everyone in the shipping trade across the supply lines must pay close attention to the market in order to adjust their strategies accordingly. It has been demonstrated that the rates may go either way depending on whether you look at this as a short term or long term problem. Accurate and timely information remains a key business asset in the shipping industry.

Nelson Cabrera
Nelson leads global business development efforts within ShipLilly and has been featured as a logistics expert in numerous publications, including SupplyChainBrain, The Bulletin Panama, Logistics Management, and the Miami Herald.

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