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carriers on the Far East-Europe trade are
repeatedly announcing price increases of
more than 100 per cent of the market price,
while providing no reasonable justification
and for the fifth time this year, writes
Alphaliner.
It has produced a situation where freight
rates take a sudden hefty jump at the start
of every month as carriers implement their
monthly rate hikes, only to fall back to
their old levels over the course of the
month for the cycle to be repeated again
in the following month.
The fact that the ocean carriers were
largely unsuccessful with their four previous
attempts to raise rates, has not stopped
them from trying to impose another unilateral
General Rate Increase (GRI), writes the
Paris based research house.
While spot rates currently stand at only
US$600 per TEU, carriers are nevertheless
proposing a GRI of up to $1,000 per TEU
to be implemented for the Far East-North
Europe route on April 1.
The amount of the rate increase is the
highest ever proposed on this trade lane.
The record GRI quantum is difficult to justify,
as demand and supply conditions remain unfavourable
for carriers.
While the falling value of the euro is
expected to curb head-haul volume growth
from Asia to Europe this year, shipping
lines are still pushing ahead with capacity
increases on this route. A total of 51 large
container ships, ranging from 3,800 to 19,200
TEU, are due to be delivered this year.
All of these newbuildings are expected
joint the Far East to Europe trade, where
they will add significant extra capacity.
The frequency of the GRI announcements and
the quantum of the rate increases have been
increasing steadily since 2011.
Previously, rate increases were usually
timed to coincide with expected peak shipping
periods while the quantum of the increases
rarely exceeded $300 per TEU. At present,
GRIs have become an almost monthly affair,
while the quantum of the increases has become
increasingly stratospheric.
Despite decreasing operating costs due
to the deployment of larger vessels, the
wholesale adoption of slow steaming, as
well as the recent fall in bunker fuel prices,
the proposed GRI quanta have increased.
Presently, they exceed by far the breakeven
rate on the Far East - North Europe trade,
which Alphaliner estimates to be in the
region of $750-800 per TEU, based on current
fuel prices.
Yet it wasn't supposed to have ended
up this way when the Far Eastern Freight
Conference (FEFC) was outlawed in October
2008 following the repeal of the EU block
exemption for liner shipping conferences.
Since then, carriers had to establish
individual pricing policies in terms of
ocean freight and surcharges as they were
no longer permitted to use conference tariffs
and charges.
Instead of establishing a more competitive
landscape for carriers to price according
to their respective service levels and cost
base, the move has created a dysfunctional
pricing system, where ocean freight and
surcharges are set in an arbitrary manner.
At the same time, carriers have been accused
of price signalling through GRI announcements
because competitors have rapidly replicated
them.
Although the European Commission had
initiated proceedings against carriers in
November 2013 for alleged price signalling
practices, the investigations have so far
failed to deliver definite results.
In the meantime, carriers' tariff setting
practices have become increasingly random.
One example of arbitrary elements concerns
the BAF (bunker adjustment factor) charges
currently applied by carriers.
Despite operating some of the most efficient
ships in the trade, Maersk's BAF charges
are currently the most expensive of all
carriers in the Far East-Europe trade.
Based on Alphaliner's survey of published
BAF charges for April, Maersk's BAF of $390
per TEU is 29 per cent higher than the market
average, and more than twice as high as
the bunker surcharge applied by OOCL, which
currently has the lowest BAF at $151 per
TEU (excluding carriers who have rolled
BAF into their ocean freight charges).
Although Maersk has moved from a monthly
to a quarterly basis for their BAF review
since January 2015, their current BAF charges
are still difficult to justify. While carriers
need to earn a reasonable return for providing
their shipping services, the current freight
pricing system has become untenable.
Bringing back the conference system (albeit
with provisions against cartel behaviour)
should be explored to bring some sanity
and consistency back to the liner shipping
system.
A controlled conference arrangement (similar
to the role played by the TSA on the transpacific
trade) would allow for a more consistent
and transparent approach towards the setting
of carrier surcharges and the application
of general rate increases on the Far East-Europe
trade.
Currently, there is no transparency and
consistency in both the application of carrier
surcharges such as BAF and CAF, as well
as the implementation of carrier rate increase
plans.
Allowing carriers to set common tariffs
and making them open to public scrutiny
could be a better way of ensuring that such
tariffs are set at fair and consistent levels,
while still allowing carriers to engage
in individual price negotiations with shippers,
based on service levels and volume commitments.
The proponents of liner shipping conferences
have long argued that the industry has a
number of features that are inconsistent
with the requirements of perfect competition,
notably regular scheduled services, economies
of scale, capacity indivisibilities, high
fixed costs, infeasibility of keeping inventories,
divisible and variable demand, and network
effects - all of which could endanger the
provision of regular and reliable services
and bring about price instability.
The evidence observed in the last four
and a half years since the abolition of
liner conferences in the European trades
suggests that there has indeed been a deterioration
in carriers' service reliability while rate
volatility has increased.
It is however debatable if these results
were due mainly to the abolition of conferences,
as the period also coincided with an unprecedented
level of surplus capacity in the industry.
What is clear, however, is that the current
pricing structure is not workable and is
beneficial to neither shippers nor carriers.
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