The wild east-west trade

It is difficult for a periodical such as Container Shipping & Trade to keep up with the wild ways in which freight rates have been swinging recently. Nowhere is this truer than on the Asia-Europe trade, which over the last few years has become such a rollercoaster that it appears almost impossible to predict which way it is going to go next.

Consider the twists and turns of the last year. 2011 was a complete bath for carriers, and much of it was their own doing. They were hit by the recession in 2009, when volumes nosedived unexpectedly. This really was unexpected; despite the collapse of Lehman Brothers in autumn 2008, the downturn that hit the transport of physical goods did not take place for another six to eight months - long enough for carriers and the rest of us to think we might have got away with it. Carriers clawed things back into balance the following year through a massive lay up programme allied with the phoney recovery of late 2009 and 2010 - when manufacturers and retailers undertook a substantial global restocking programme.

Hindsight now tells us that a fundamental mistake was made by carriers at this point. They mistook the restocking activity for a genuine recovery, and brought back most of the capacity they had laid up. That, combined with deliveries of the largest vessels ever ordered (now coming out of the shipyards in substantial numbers) laid the basis for one of the worst freight rate wars that the industry has ever seen.

In September last year I sat in the office of a large UK-based freight forwarder, who was seething with rage at what he considered to be the wanton irresponsibility of the shipping lines fighting over market share and driving down rates to levels that were unsustainable for both carriers and forwarders. “Look at this!” he exclaimed, pulling out a sheaf of paper. The quote was from a major carrier offering carriage of a 40ft container from Shanghai to Felixstowe. The all-in figure was US$100 below the quoted bunker adjustment factor on the self-same carrier’s website. “They are prepared to pay us US$100 to carry the cargo. What kind of world are we living in?”

Forwarders earn a small margin on the bookings they make on behalf of clients, so this puts them in a difficult position. But for carriers - the parties that invest hundreds of billions in vast assets - it appears to be suicidal. And yet the rate war continued for a number of months, with everybody suffering terrible losses. Again with hindsight, it appears that the larger lines thought some of their smaller competitors would be forced out of business altogether. And indeed that happened on the transpacific, with the exit of The Containership Company.

But it did not happen on Asia-Europe. Instead, coming into 2012, something even more extraordinary happened. The lines somehow found the collective will to push rates up, through a series of general rate increases, to levels that were once again profitable. And for a few brief months – not quite half a year – everyone gave a collective sigh of relief.

However, ominous signs reappeared during the latter part of the summer. Shippers and forwarders took calls from salesmen offering lower rates. Once the slide began again, rate levels snowballed downwards, this time quicker than before. In a matter of months the rate for a 40ft went from US$3,500 to US$2,000. Once again several carriers appeared to be making a grab for market share, as if they had learned nothing from the experiences of the last couple of years.

But as I write this now, rates have once again turned a corner and are increasing sharply. In little more than a week, rates on Asia-Europe have risen by an inexplicable 38 per cent as a general rate increase has, for the most part, been accepted by customers. This has been helped by the first proper capacity withdrawals from the trade for a while. The economic dynamics of this trade seem to have been replaced by an instinct; as if somehow there is less information for people to base their pricing and buying on, even though we are in a period when there is more intelligence available than ever before.

It would be foolish to try and predict where rates are going to go next. They could go anywhere. But it does not take a genius to realise that since demand for container transport is derived from general economic demand, it does not matter how low rates go. If there is less demand in European high streets from consumers, there will be less demand for container shipping on the Asia-Europe trade. And all the signs from Europe are that demand will continue to be depressed. The only way for the liner shipping industry to address this is by restricting capacity. Ultimately, given the number of new, and large, vessels that will be delivered in 2013, the primary method of restricting capacity will have to be through layups. CST