Too much capacity is being injected into the Transatlantic tradelane, suggesting rates are likely to topple
The Transatlantic’s high of full ships and strong rates in 2022 has started to slip due to overcapacity, as carriers redeploy tonnage into the trade from other areas.
Atlantic Container Line (ACL) chief executive Andrew Abbott sums it up, “2022 was the best year in ACL’s history, it was unbelievable, and we have never experienced anything like that.”
Changing lifestyle patterns due to the pandemic helped to buoy the Transatlantic trade, although its boom was much smaller than the Asian trades. Mr Abbott explains, “On the Asia trade, volumes jumped because it is primarily a consumer products trade. During the pandemic, people stayed home and started buying stuff; they were fixing up their house rather than travelling, going out and doing things. The Atlantic does not have the percentage of consumer products as Asia, so the increased volume was more manageable, except for alcohol. People began drinking and partying more at home. Younger people in the US discovered spirits - Scottish and Irish whiskey took off.” This trend did not end with the pandemic, with Mr Abbott noting that while people are now going out again, they are continuing to party more at home.
A healthy demand on the Transatlantic, combined with a capacity shortage (carriers diverted any available ships to Asia to capitalise on the Asian boom), led to a very strong trade during 2022. Port congestion also played a role. Mr Abbott says, “The Atlantic picked up during 2021 and 2022 while most carriers were diverting hardware to Asia. Supply and demand balance shifted to the carrier side. In fact, there was a reduction in effective capacity as the port congestion delays caused most lines to lose voyages.”
50% increase
That situation began to change during 2022, with the Atlantic gaining 50% more capacity due to the redeployment of ships from Russian trades to the Atlantic because of sanctions. Furthermore, as the Asian trades slowed, larger ships were moved to the Atlantic from Asia to take advantage of the better rates there. Mr Abbott comments, “The 50% increase in Atlantic capacity during 2022 is sending the supply and demand balance totally out of whack. With carriers building so many monster ships for delivery in 2023 and 2024 and the market going the other way, rates can only go one way and that is down.”
2022 saw ACL constantly overbooked and turning cargo away for the first half of the year. By mid-summer it was “comfortably full” at 100% every week. But the market started to change in September, when the strike at Liverpool Port stopped ACL from operating in the UK.
Mr Abbott comments, “We diverted Irish cargo to the Continent but were shut down for over a month in the UK.” While the issues are resolved now, ACL has lost some regular customers who were forced to signs contracts for space with carriers using other UK ports while the strike was on.
“That put a hole in our ships for a while, as we could replace some of it with Irish and Continental business but not everything. On a capacity basis, we are around 90% utilised today,” says Mr Abbott.
ACL’s movement of rates over the last few months is indicative of the market situation on the Transatlantic. Its rates hit a “high-water mark” in October – the highest rates in ACL’s history. But then they started to slip. Mr Abbott says, “They haven’t fallen off a cliff like they have on the Transpacific but are just drifting downwards so far. It’s probably dropped 10-12% since October, and everyone is wondering what is going happen now. Clearly there is too much capacity; there have been three new services that started in 2022 and customer demand doesn’t need the extra space.”
Despite the market challenges, Mr Abbott expects 2023 to be a good year for ACL, because it serves the roro market as well as the container sector. Its fleet of five G4 conros carry 3,800 TEU of containers, 720 TEU of roro and 1,000 cars. In contrast to the weakening of the Transatlantic trade for containers, the roro market for US imports is very strong.
Mr Abbott explains, “Roro traffic has skyrocketed in terms of rates and volumes.”
He says two factors have affected the supply and demand picture: (1) The US$1Trn infrastructure bill for highways and bridges has increased demand for construction equipment and (2) The greater availability of microchips in Asia and the increasing volumes of Asian electric cars have caused roro carriers to divert hardware to Asia, tightening capacity everywhere ese. Mr Abbott says the company’s roro business is booked out for three months in advance.
Aside from roro traffic, the company is also in a better position compared to most carriers because ACL ships do not have as big an appetite compared with the larger capacity alliance carriers and they call at more niche ports like Baltimore, Halifax and Liverpool. “We don’t have the same competitive pressures carriers calling at the biggest ports have. This helps to protect us a bit,” says Mr Abbott.
Despite weaker container market conditions in the Transatlantic, one major positive is the port congestion seen last year has now mostly disappeared.
Mr Abbott comments, “North American east coast ports became a problem in mid-2022 as California started backing up from all the Asian cargo, compounded by the uncertainty of the west coast dock worker negotiations. Therefore, several alliance strings were diverted to the east coast, leading to congestion in New York, Baltimore, Savannah, Charleston, Norfolk and even Halifax.”
“As Asian volumes dropped, west coast congestion has reduced and most of the diversions have stopped. Most North American east coast ports are back to pre-Covid congestion-free conditions. We are back to a normal schedule again that we haven’t had for over two years.”
Looking at the year ahead for the Transatlantic trade, Mr Abbott says, “How quickly will we go back to pre-Covid behaviour? The Transatlantic fall has been slower so far compared with the Transpacific, probably because the volume drop has been far less severe. The big question is what carriers will do with the excess capacity.”
He warns, “Carriers must address the excess capacity they have put into the Atlantic. If they do, we will all have a great year; if they don’t, we will mirror the Transpacific.”
Port point of view
The Transatlantic trade is an “important pillar” for the port of Hamburg, its marketing chief executive Axel Mattern tells CST. In recent years, shipments with all areas of North and South America have developed positively. The Port of Hamburg handled 1.53M TEU in this trade in 2021 - corresponding to almost one-fifth of the total throughput.
Mr Mattern says, “The USA is the strongest partner in the Transatlantic trade and second on our ‘Top 10 partner countries list’ for container throughput with 617,000 TEU in 2021. 184,000 TEU crossed the quay in 2021 in traffic with Canada.”
And a look at South America shows container throughput in this trade lane was 4.1% better than in the previous year at 728,000 TEU.
Seven liner services connect the Port of Hamburg with the east and west coasts of the US. In addition, a new liner service between Hamburg and the Canadian port of St John was added last year. To South America, box ship operators offer five liner services to Brazil. More liner services call at the South American west coast with Colombia, Uruguay and Argentina. Other liner services serve Colombia, Ecuador, Peru and Chile through the Panama Canal.
Mr Mattern adds, “The Port of Hamburg is also intensifying its relations with both Canadian and South American ports. Last year, representatives of the port signed almost half a dozen MoUs. The focus was often on dealing with hydrogen. We expect very close co-operation here in the coming years.”
Transatlantic spot rates ‘primed to collapse’
While freight rates have been dropping consistently on most trades, they have remained elevated on the Transatlantic due to capacity issues. However, as Sea- Intelligence points out, this is changing, as carriers are injecting serious amounts of capacity on the trade lane.
From north Europe, once we head into February, the current deployment indicates a capacity growth of 48%.
Sea-Intelligence figures show that compared with 2019 (pre-pandemic), from mid-December 2022, the operated capacity on North Europe-North America east coast will shift from being roughly at the same level as in 2019, to being 20% higher.
Sea-Intelligence chief executive Alan Murphy says, “And as we get into mid-February 2023, this is poised to jump even further to 30%. However, this is not even the largest increase, as capacity from the Mediterranean will grow at an average of 25% over 2019 in January-February 2023.”
He adds, “This is at odds with demand growth (or lack thereof), as demand was down 3.4% year-on-year in August to October 2022, certainly not warranting the level of capacity injection currently planned.”
Mr Murphy explains there is a time lag of several months between spot rates and vessel utilisation. “Given this time lag, and based on the current drop in utilisation, spot rates on the Transatlantic are primed to collapse in the coming months,” he warns.
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