Industry analysts scoffed at the warning. “When a line goes under, it doesn’t mean that the capacity goes away,” said Paul Bingham, managing director of global trade and transportation at IHS Global Insight. Competing carriers simply purchase the vessels at fire-sale prices and then cut prices in an attempt to fill them, he said.

Carriers attempting to push unreasonable rate increases by threatening future bankruptcies and capacity crunches insult their customers. Shippers are well aware of reports that banks and investor groups in recent weeks have come to the support of troubled lines such as Chile’s CSAV, Germany’s Hapag-Lloyd and Israel’s Zim Integrated Shipping Services. Some Asian lines are owned by their governments or have close ties to the governments and national banks.

While these deep pockets cannot last forever, current levels of support could be enough to get carriers through the end of the year, Bingham said. In fact, monthly container volumes indicate imports are increasing as the major east-west trade lanes move into the traditional peak shipping season.

Nigel Gault, IHS Global Insight’s chief economist, said in a July 13 report that imports would increase in the second half of the year as “U.S. demand recovers and the inventory cycle turns.”

IHS Global Insight does not believe the seasonal spurt in cargo volumes will lead to significant increases in freight rates. Rather, carriers will enjoy increased revenue based mostly on greater cargo volumes in late summer and fall. In this environment, Bingham said, carriers can survive, and one day they may prosper if they exhibit pricing discipline.

Industry veterans marvel at how carriers attempt to fill their ships by undercutting each other on rates. A vessel sailing at 90 percent capacity in which every container is carried at a loss loses money, but a ship operating at 70 percent capacity in which every slot produces a small profit makes money for the carrier.

Even in these tough times, vessel utilization rates are respectable. According to the TSA, ships arriving on the West Coast in late June were operating at 86 percent of capacity, and average vessel utilization from Asia to the East Coast was 82 percent.

Carriers, however, were engaged in a vicious rate war. One or two lines would offer a spot rate of $900 from Hong Kong to Los Angeles, and other lines would match it or drop their rates to $850. An NVO would get commitments from customers for 100 containers at $800 and would shop that rate until a carrier would accept it. Never mind that carriers were losing money on every container they carried.

No one expects shippers to accept a

SHIP ORDERS

0% 20% 40% 60% 80% 100%

0% 20% 40% 60% 80% 100% UASC Pacific Int’l Line Hyundai Zim CSAV Yang Ming “K” Line Hamburg Sud OOCL MOL Hanjin NYK Line China Shipping Hapag-Lloyd Cosco APL

Evergreen CMA CGM

MSC Maersk

Note: For comprehensive data on the Top 50 Global Ship Operators, see page 30.

Source: AXS-Alphaliner, www.axs-alphaliner.com

■ As of July 13, the top 20 global ship operators had as much as 102 percent of their existing capacity

(United Arab Shipping) and as little as 0 percent (Evergreen) on order.

120%

$500-per-FEU increase on a current rate of $1,000. Carriers couldn’t get a $500 increase in the past when trade was brisk, after all, and rates were $2,500. Furthermore, any traffic manager who told top management that the company’s freight bill was going up 50 percent would be fired on the spot.

This is especially true of the large discount and fixed-price retailers that operate on thin margins and have profited from today’s low rates. Family Dollar Stores, in reporting its fiscal third-quarter earnings last week, said its gross margin rose to 36. 2 percent from 34. 6 percent due in part to lower freight expenses.

But rational shippers do not expect carriers will continue to carry cargo for a loss. Importers generally concede they can tolerate an increase of $100 to $150 per FEU, at least through the peak season.

Importers also stress, however, that they cannot accept even a modest increase unless their competitors’ rates increase the same amount.

“Carriers are going to ask everybody they can for an increase,” said Dave Akers, managing director of the Toy Shippers Association. That’s alright, as long as everyone stays competitive, he said.

Rational carrier executives, meanwhile, know they must be more disciplined in their pricing, especially now that traffic is increasing in the eastbound Pacific. “The current rates are unsustainable. Each line has to move forward according to its own contracts,” said Frankie Lau, director of marketing at OOCL.

Contracts vary from line to line and among customers of the same line, Lau said. Some contracts allow reopeners by mutual agreement of the carrier and shipper. Other contracts allow a rate change based upon changes in the public tariff.

Other contracts prohibit a rate increase during the life of the agreement, but carriers may even try to reopen those agreements. Carriers note when rates are dropping, shippers do not hesitate to amend their contracts. By the same token, some customers who are asked to renegotiate their contract will shop their business to other carriers or to NVOs.

Lau said any carrier that follows the TSA guideline and files a $500 rate increase to take effect in mid-August should be prepared to negotiate hard. “It will trigger a lot of discussion between now and then,” he said. JOC

 

Contact Bill Mongelluzzo at bmongelluzzo@joc.com.