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WHILE
intra-Asia trade volumes are expected to
experience persistent growth, the region
has become an unstable and feeble market
over the past few years despite its promising
prospects.
As
the rates have shrunk to a dangerously low
level, intra-Asia carriers are beset with
survival problem now.
"We
will see more bankruptcies if rates don't
go up," warned a senior manager of
a large intra-Asian shipping company.
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,"
he said.
But
AGS World Transport CEO Mike Dye took a
different view. "We see more demand
for LCL shipments across Asia, as freight
forwarders want the flexibility of moving
smaller shipments with greater frequency
and to work with a neutral service provider."
Mr
Dye said he was even seeing mobile phones
being shipped by air freight. "We have
never seen that before and I have been in
this business for 25 years," he said.
Phone
and electronics orders tended to be smaller
and better suited to LCL shipments, Mr Dye
said. Also making LCL more attractive was
the reduction in overall factory to door
transit, and the gap in transport costs
between air and ocean had grown even bigger
because of the fall in sea freight rates.
All
of which suits the intra-Asia trade well.
It is the fastest growing trade corridor
in the world. Last year, the routes accounted
for 25 per cent of Asia's US$$6 trillion
in annual exports. In 2013, 1.4 million
TEU moved in intra-Asia trades, almost double
the volume handled in 2007. Emerging Asia
economies are expected to grow by 6.9 per
cent per annum from 2014 through 2018.
But
the growing volumes are creating havoc at
some ports around Asia that are struggling
with congestion. Large transshipment hubs
such as Hong Kong, Singapore and Shanghai
are battling to handle the larger ships
that bring greater volumes and stay in port
for longer.
The
senior intra-Asia shipping line manager
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 in
recent years due to worsening overcapacity,
with 60 companies 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 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
issue is competitive behaviour, which the
CEO called "charity" as some lines
are moving containers almost free of charge.
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."
Additionally,
the rate to Kaohsiung fell at low to $218
per TEU, while the Shanghai to Hong Kong
freight rate once stood at just $69 per
TEU.
In
2012, The HKSG Group 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, which was October
2012, 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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