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WHILE
Intra-Asia trade volumes are expected to
experience persistent growth, this region
has ironically become a very unstable and
feeble market over the past few years despite
having promising prospects.
As
the rates have shrunk to a dangerously low
level, many Intra-Asia carriers are beset
with survival problem now.
"We
will see more bankruptcies if rates don't
go up," warned chief executive Tim
Wickmann of Singapore-based MCC Transport,
a subsidiary of AP Moller-Maersk, in a media
interview in April.
He
suggested that Intra-Asia carriers should
pursue more vessel-sharing agreements, slot
swaps or joint sailings, and quit competing
for more containers.
"And
then the supply-demand balance will be more
in our favour, and we can increase rates
and actually start to earn money,"
Mr Wickmann was quoted by Lloyd's List as
saying.
He
believed that "if shipping lines continue
to cooperate and help each other to expand
portfolios, it's not necessary to add capacity."
In
spite of five to six per cent growth, freight
rates in the region have deteriorated over
the past few years due to worsening overcapacity,
reported Lloyd's List, with 60 companies
plying the trade creating fierce competition.
"Rates
just keep going down. It has really been
quite bad in the key Intra-Asia corridors,"
he said.
"One
of the problems is [that] there is no barrier
for entry in this trade... quite often,
the situation is not because customers ask
for lower rates. It's because shipping lines
are giving them lower rates to get more
business."
Another
major issue is lines' competition behaviour,
which the CEO called "charity"
as some lines are moving containers almost
for free.
He
continued: "Sometimes shipping lines
just like to chase more containers. It has
traditionally been the case... Despite being
so profit focused, we are also sometimes
tempted to add more space when demand is
high," he said.
"But
actually what we should think about is to
raise rates."
According
to the Shanghai Containerised Freight Index
(SCFI), the rate from Shanghai to Japanese
west coast ports was only US$333 per TEU
and $321 per TEU to the east coast on April
18. And this is the all-in rate.
On
the route from Shanghai to Singapore, the
rate was just $238 per TEU on April 25,
and it was $204 per TEU from Shanghai to
Busan.
Additionally,
the rate to Kaohsiung fell to $218 per TEU,
while the Shanghai to Hong Kong freight
rate stood at just $69 per TEU.
In
2012, The Container Shipping Manager conducted
a study on the Northeast Asia to Southeast
Asia trade, within the Intra-Asia market,
to get an idea of the potential for profit,
based on a bunker cost of $650 per ton.
The
study was also conducted under the assumption
that the carrier was operating time chartered
vessels. The vessels used for the calculation
were in the 4,000 TEU range.
At
the time of the study, we found that carriers
needed a freight rate just under $600 per
TEU to cover the costs of the head and backhaul
voyage.
The
rate at the time fell woefully short at
roughly $380 per TEU. However, it may have
been possible for the carrier to breakeven
or even manage a slight profit based on
the backhaul voyage if the line is able
to book enough cargo at a decent rate.
Nevertheless,
the headhaul rate at the time was well above
the Shanghai-Singapore freight rate today
of just $238 per TEU.
If
operating costs have not changed much since
October 2012, then we can safely assume
that the lines are losing a lot of money
on the trade now.
Therefore,
the strong growth rate is of little consequence
if rates are falling.
Of
course the lines using larger ships will
fare better, presumably, given their lower
unit costs.
Currently,
the operating environment is very harsh
based on the above data, particularly for
the carriers that derive a bulk of their
income from the Intra-Asia trade.
So,
the only hope that these players have is
for some serious capacity cutbacks by the
lines that are now throwing in larger ships.
There is always the chance of course that
demand surprises on the positive side. But
it would have to be a very significant surprise
to turn the current situation around.
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