Predictions seem to point to 2014 being a year of rate hikes, alliances, a lack of reliability, and strategic changes. Although ocean cargo carriers have been struggling in recent years, some say this is the year that they will return to profitability.
Are rate hikes on ocean cargo imminent?
An increased demand for transpacific cargo has allowed operators in the Asia-U.S. trade lanes to increase prices. On January 15th a general rate increase (GRI) among members of the Transpacific Stabilization Agreement (TSA) went into effect, adding an average of $300 to the price for transporting each 40-ft. container. The momentum could potentially lead to another increase by the same amount in March, and perhaps an additional boost in May. Carrier lines clearly don’t want to miss the opportunity to capitalize on pent-up demand, greater economic security, and depleted inventories.
The TSA has also announced a 12 month revenue and cost recovery program for 2014-15 contracts that would increase rates by $300 per FEU for U.S. West cargo and $400 for all other cargo. Exact rate hikes, however, will depend on the revenue baselines that are set during contract negotiations. No matter what, TSA officials have made it clear that simply rolling over last year’s rates is not an option. This is particularly disappointing news for the shippers who have actually requested a reduction in rates. A business is a business, and ocean carriers are looking to see a net increase in addition to full cost recoveries for fuel, chassis, etc.
Ocean Carrier Alliances
Currently, 70% of U.S. loaded container traffic is controlled by three emerging carrier alliances. These include the P3 Alliance (Maersk, CMA-CGM, and MSC), the G6 Alliance (APL, Hapag-Lloyd, Hyundai Merchant Marine, Mitsui OSK Lines, NYK, and Orient Overseas) and the CKYH Alliance. Together these three groups of carriers control 80% of West Coast operations, 65% of East Coast operations, and 70% of Gulf operations. By forming an alliance, carriers work together to control scheduled deployments on a variety of trade lanes and share vessels in order to increase each carrier’s availability and maximize volume concentration. These alliances originally worked together exclusively in the Europe-Asia trade, but have now expanded their influence to both the transatlantic and transpacific regions.
Some carriers have neglected to involve themselves in sharing agreements, instead opting to provide all their own vessels, fill all their own slots, and make all their own profit. While admirable, this tactic is not the most successful method in an industry saturated with these partnerships of grand proportions. Although the P3 Alliance still has to be approved, in all likelihood this will occur in late March, creating a group that operates 255 vessels and 28 vessel strings – an even larger system than that of the G6.
While shippers are understandably concerned about having fewer options, this hasn’t stopped the consolidations from happening. The hope is that the alliances will result in a lower rate level in the long term if the carriers let shippers benefit from the carriers’ significant unit costs. That being said, the think tank Alphaliner predicts that (at least when it comes to the P3 Alliance) although some services will likely be rationalized, shippers shouldn’t expect capacity reductions. The forecast indicates that P3 will likely deploy almost all of their 130 ships of above 10,000 20 ft. TEU on Asia-Europe and Pacific routes, leaving the Far East and North America with less coverage.
A Lack of Reliability
It’s going to be important for major players to adapt to an industry with too much vessel capacity and cargo volumes that just aren’t living up to previous predictions. Most operators are responding to this issue by rushing to slash costs, which may lead to a significant decrease in reliability among carriers. This is certainly true if 2013 is any indication of what is to come. Containership reliability worsened in every quarter of 2013, with 4th quarter performance taking the on-time average below 64% – the lowest in two years. In fact, the results of 2013’s last quarter was 11.4% lower than the same quarter in 2012.
Clearly, the focus is moving away from reliability and onto cost-cutting techniques. Shippers are frustrated that they have to pay more for poorer services while lines save money. If the frustration reaches a boiling point and shippers become unwilling to accept additional rate increases, this may open the market to new entrants who are willing to guarantee a greater degree of reliability.
Maersk is currently rated as the most reliable of all the lines, with on-time reliability in the 4th quarter of 2013 reaching 80%. It was one of only eight companies that actually increased reliability scores after the 3rd quarter. Following behind Maersk is Evergreen (at #2) and Yang Ming (at #3). Rounding out the very bottom of the list is MSC and CSAV. Chances are these rankings won’t change much throughout 2014. However, it could become harder to assess performance as carriers continue to consolidate. In addition, the alliances may bring about significant restructuring, which could upset reliability even further (albeit hopefully temporarily).
A New Strategy
The biggest hope for the utilization of containerships lies with the U.S., which has been a key driver for global growth and continues to develop, slowly but surely. Despite this growth, the World Shipping Council openly admits that international freight is a tough business. The biggest strategic change that many carriers have employed, in an attempt to save money, has been to move away from higher cost and premium services and instead focus on offering just the basics with increased efficiency. The number of ocean carriers offering sophisticated logistics services and value-added services has waned significantly. Instead, stand-alone companies have been responsible for providing these more premium offerings to those who can both benefit and afford them.