The planned merger of the Transpacific Stabilization Agreement (TSA) and Westbound Transpacific Stabilization Agreement (WTSA) is expected to go forward on April 14, said Brian Conrad, executive director of the two container carrier discussion agreements.
Speaking Tuesday at the 17th annual Northeast Trade and Transportation Conference of the Coalition of New England Companies for Trade (CONECT), he said carrier revenues are lower than they were in 2011 and are "still well short of where they need to be for the carriers to feel that they are sustainable financially for the long run."
Export rates to Asia have been falling steadily since 2011, while import rates have shown seasonal volatility. Although carriers want less volatility in rates, Conrad predicted that would be a challenge in the coming year.
Discussing volumes, he said the eastbound transpacific trade would see growth of 2-3 percent after a flat 2012, and exports on the transpacific will grow at a rate close to 4 percent. He predicted westbound trade will improve as China becomes more of a consumer market than in the past and the U.S. economy improves, creating a need for packaging in the Far East and boosting exports of raw materials such as waste paper and scrap. But he said the imbalance in trade will remain.
Carriers need to get accustomed to a trade where growth of 3-4 percent is considered a decent year, Conrad said.
He noted TSA and WTSA carrier members do not discuss or manage capacity, but with containership capacity expected to grow globally by about 8-9 percent, he said 2013 is likely to be a "capacity overhang year." While most new capacity is on large ships headed for the Asia-Europe trade, he said the transpacific market may be affected by the cascading of ships from this trade.
Starting next year and continuing into 2015, he said some analysts predict supply and demand will begin to come more into equilibrium as fewer ships are ordered. He noted Gianluigi Aponte, chief executive officer of Mediterannean Shipping Co., last week told the Lloyd's List
newspaper that his company was not planning to order additional vessels.
Rates and balancing supply and demand will be "something the carriers will be wrestling with for the rest of the year," he said.
Speaking at the same conference, Debra Koppenaal of The Gem Group noted she believes capacity in the transpacific will increase by about 6 percent.
"This is a significant increase and does not bode well for the full increases that the carriers are looking for in April and May" in freight rates, she explained.
She said carriers are expected to continue to mitigate expenses by continuing to use slow steaming, and Koppenaal, whose company makes promotional products, noted this is a challenge for companies with short lead times between orders and deliveries.
She believes transpacific freight will grow 4-5 percent, but Conrad said "I don't believe 4-5 percent increases are really going to help carriers that much because it does not bring them to breakeven, sustainable levels."
Discussing the merger of the two discussion agreements, Conrad said it will be accomplished by having the operations of WTSA subsumed by the larger TSA.
He noted the transpacific is an import-driven trade where imports are one-and-a-half to two-times as large as exports. He said the trade is also challenging because many exports, including agricultural products, originate far away from population centers and distribution facilities where imports from Asia are bound.
Combining the two groups, initially for a trial period of two years, will "streamline" discussions of the westbound trade. In the past, he explained, members of TSA could not touch on export issues during their discussions.
"It was clumsy, it was not cost effective, particularly if you look at some of the rates and revenues on the westbound side," Conrad said. "This will enable the carriers to better discuss roundtrip trade conditions and exchange information more on what is going on on a roundtrip basis, including repositioning containers from import locations to export locations.
"That will hopefully help carriers make more informed decisions not just on rates, but service as well," he said.
Conrad said the agreements plan to continue to have shipper advisory boards.
Rick Wen, vice president of business development at OOCL, told CONECT members that collectively, container carriers have lost billions of dollars in three of the past four years while continuing to invest heavily in ships, containers, and terminals.
He said only four of the top 20 carriers were profitable last year and, because of deteriorating credit ratings, the ability of the industry to access capital markets is deteriorating.
Wen noted since 2008, with the exception of 2010, container shipping has had difficulty making money.
“There has been a big shift from market challenge to cost challenge, and a lot of that has to do with fuel,” he said, adding since 2009 fuel prices have tripled and moved from being the third largest cost for container carriers to the largest cost, by far.
He also noted while the container industry has traditionally grown at a faster rate than world GDP, that multiple has been muted in recent years.
Wen said the shipping industry appears to prefer alliance expansion to consolidation, noting it's “difficult to grow scale by acquisition. By partnering with other carriers we are able to achieve greater economy of scale, pool vessels, have more effective service networks and more sailings, more limited port ranges to maximize transit times.”
Wen said the increased size of ships will make port productivity a major challenge for carriers, and he noted OOCL is spending $1 billion to build a highly automated and environmentally advanced terminal at the Middle Harbor in Long Beach, Calif., that will be capable of handling three post-Panamax ships simultaneously.
He also said the G6 alliance, of which OOCL is a member, and Maersk have announced plans to bring bigger ships to the U.S. East Coast from Asia through the Suez Canal, and this will create challenges for ports, some of which were planning on the bigger ships arriving when the Panama Canal expansion is completed in 2015.
Wen said because carriers have limited resources and are investing heavily in vessels, container availablity could be a challenge.
“Not only are you going to have to worry about space during peak season, you are going to have to worry about equipment availability,” he said.
Conrad doesn't expect the westbound transpacifc trade in terms of rates and volumes to change significantly because of the merger of TSA and WTSA.
The westbound market "is still going to be driven by basic market fundamentals. You are still going to have relatively low utilizations, it is going to be heavy commodities so ships cannot be filled. I certainly don't expect rates to go from where they are today at very depressed levels and they are not going to triple or quadruple overnight simply because there is a discussion agreement talkling about them," he said. "It will be nice if the carriers can have a little bit of stability in the market and maybe get some of those rates up by reasonable amounts, but I don't think people need to be concerned that just because there is a westbound discussion section in TSA that you are going to see $1,000 increases on the westbound TSA. The market fundamentals still have to be recognized." - Chris Dupin