Maintaining freight rate levels is key to maintaining carrier profits in this crisis hit year that has seen shipping lines slash services, managing capacity in a, so far, successful effort to keep rates at a profitable level.
Carriers have maintained the rates while the volumes have decreased substantially, but with the crisis alleviating a little the third quarter volumes are expected to recover a little as the effects of the global pandemic are mitigated, that will mean lines will bring some idled tonnage back into service to meet the higher in demand.
Traditionally, in economic downturns, the lines have seen rates crash as carriers battle for market share and that has led to the shipping lines seeing profits crash as a result. So far the lines have avoided this trap, but as demand rises, Barclays’ Head of European Transport, Mark McVicar believes that there is a risk that this traditional battle could resume.
“The lines learnt from the 2009 financial crisis, and they’re not going to make the same mistakes, at that time there was 50% of the fleet on order, today there is less than 10%,” McVicar told Container News.
The key are the freight rates in the third quarter, if the spot rates start to decline then the lines could see their earnings fall too.
Barclays says that the lines have used a combination of returning ships to charterers, many of which have gone into lay-up, including some that will be scrapped when the demolition yards re-open, the retrofitting of scrubber technology and blank sailings to manage capacity levels.
“We took out capacity elsewhere and returned some charter ships. A third of our transport capacities is chartered, which corresponds to about half of our shipping fleet. This gives us a high degree of flexibility,” said Hapag-Lloyd, with the experience of the German line likely to be closely replicated by other lines.
Using capacity management to maintain utilisation rates, and therefore freight rates to maintain prices.
According to Simon Heaney at Drewry Shipping Consultants the capacity cuts amounted to 2.2m TEU in early May, globally, but the consultancy expects that to increase when they include the latest figure next week, with reports of 2.7m TEU, 11.6% of the total fleet expected to be accurate.
“The size of the inactive fleet varies every week and is impacted by dry dockings, reduced sailings due to soft demands and ability to redeliver TC tonnage,” a Maersk spokesperson told Container News, he went on to say, “Especially in the current soft market volume demands impact the level of the inactive fleet.”
The level of the inactive fleet is certainly a factor of demand, but with carriers looking to maintain income the key to that is maintaining average freight rate levels in the periods where there is a cyclical downturn.
“Carriers have more sensitivity to cuts in freight rates because a rate cut means your income has decreased, but that your costs remain the same. A 5% cut in average freight rates would lead to a significant fall in earnings,” said McVicar.
In effect, the lines have cut their costs, collectively, and maintained freight rates, by cutting services, some 70% of costs disappears with the volumes, says the analyst with the remaining 30% a fixed cost that remains.
“You end up with a 7-8% increase in unit costs, but crucially you remain profitable, albeit with a reduced profitability,” explained the financial expert.
Pointing to Maersk’s EBITDA, earnings before interest, tax depreciation and amortisation, the Danish company, forecast it would achieve US$5.5 billion income in the first quarter. That figure will now be reduced to approximately US$4 billion according to Barclays’ own forecast, “it’s down, but it’s still a decent profit,” commented McVicar.
Assuming that other lines have made similar calculations, then the industry as a whole is likely to see earnings fall around 30% overall, with some variations for each line depending on the trades in which the carrier operates in, the mix of vessels, owned and chartered, and the cargo mix.
McVicar commented that Maersk CEO Søren Skou pointed out in the first quarter that, where the industry ends up this year largely depends on freight rates.
Barclays view for the year was set out in the second quarter with the transport analysts waiting to see the first quarter figures in order to be able to make a more informed forecast for the rest of the year.
As a result the with Q1 volumes declining 3%, the analysts understood that the major impact of the crisis would be seen in the second quarter, forecasting volumes to fall year-on-year by 20% with a steady recovery in Q3 and Q4 with volumes down 10% and 5% respectively. Increased volumes this year will be sequential, quarter over quarter, rather annual comparisons.
“We will probably see some growth in 2021, depending on what the world looks like at the end of the year, and whether there is a second wave of infections” said McVicar, but the third quarter is where the difficulties for the lines could begin as volumes and demand begin to rise and vessels are brought back into service the competition for market share could again be seen to increase. It is at this point that the risk for the lines is apparent, explained McVicar, with the lines reverting to the intense competition that has seen rates collapse in the past.
As financial experts expect the easing of the lockdown and a tentative return of some demand, leading to the increase in capacity on some trades, the lines have been proactive in announcing third quarter cancellations early.
THE Alliance, which includes Hapag-Lloyd, ONE, Yang Ming and HMM, has announced void sailings on several routes, particularly in the Asia – North Europe trade for the upcoming third quarter of 2020.
Due to the extraordinary impact of the global pandemic, the members of THE Alliance decided to adjust the schedules for July, August and September in order to match the significantly reduced market demand.
Asia and North Europe
FE4 will remain merged with FE2 until the end of September 2020.
FE2 will continue to run a combined rotation with eastbound routing via Cape of Good Hope as follows:
Pusan – Shanghai – Ningbo – Yantian – Singapore – (Suez) – Rotterdam – Southampton – Le Havre – Hamburg – Rotterdam – (Cape of Good Hope) – Singapore – Pusan
FE3 will extend to cover direct calling at Central China ports from July to September as follows:
Ningbo – Shanghai – Xiamen – Kaohsiung – Hong Kong – Yantian – (Suez) – Rotterdam – Hamburg – Antwerp – London Gateway – (Suez) – Jebel Ali – Singapore – Yantian – Hong Kong – Kaohsiung – Ningbo
Asia and the Mediterranean
Week 28 – MD2, MD3 void
Week 29 – MD1 void
Week 31 – MD2, MD3 void
Transpacific – West Coast
Week 27 – PS3, PN3 and PN4 void
Week 28 – PS4 void
Week 29 – PS3, PN3 and PN4 void
Week 30 – PS4 void
Week 31 – PS3, PN3 and PN4 void
PS5 will continue to be suspended for weeks 27 to 31.
Transpacific – East Coast (via Panama and Suez canals)
EC3 will tentatively remain merged with EC1 in July, though this could change.
Asia and Middle East
AG1 will remain merged with AG3 in July under the current AG3 combined service rotation.
AG2 will maintain westbound direct calling at Xiamen in July.
Asia and India
Week 28 – PS3 (India sector) void
Week 30 – PS3 (India sector) void
Week 26 – AL1, AL4 void
Week 28 – AL1 void
Week 29 – AL4 void
Week 31 – AL1 void
THE Alliance said that the affected services are expected to resume normal operations once market conditions improve, while it will provide updates, if required, on any necessary service changes according to the market situation.
At the same time, the 2M Alliance, comprised of the two largest shipping companies Maersk and MSC, has also published its Q3 blank sailing programme.
The carriers will continue the suspension of the AE2/Swan (Asia – North Europe) and AE20/Dragon (Asia – Mediterranean) services.
Maersk and MSC provide their customers with alternative options in order to “accommodate the small, gradual recovery in cargo volume at this stage,” as MSC said.
Maersk’s alternative coverage:
AE2 – Alternative coverage for AE2 cancellation Westbound and Eastbound
- Yantian: Covered by inducement on AE5
- Rotterdam: Covered by alternative AE1 and AE5 services
- Felixstowe: Covered by alternative AE1 service and inducement on AE7
- Antwerp: Covered by alternative AE6 service
- Rotterdam: Covered by AE10 service
- Felixstowe: Covered by AE6 service
- Antwerp: Covered by AE6 service
- Algeciras: Covered by inducement of AE5 service
AE20 – Alternative coverage for AE20 cancellation Westbound and Eastbound
- Beirut: Covered by feeder via Port Said
- La Spezia: Covered by feeder via Barcelona
- Genoa: Covered by feeder via Barcelona
- Fos Sur Mer: Covered on AE7 service via Tangiers
- La Spezia: Covered by feeder via Barcelona on AE11
- Genoa: Loaded via Vado Ligure and covered by feeder via Barcelona on AE11
- Fos Sur Mer: Covered by feeder via Barcelona on AE11
- Valencia: Covered on alternative AE11 service Eastbound
- Barcelona: Covered on alternative AE11 service Eastbound
- King Abdullah: Covered by inducement of AE11 service
- Abu Dhabi: Covered by inducement of AE11 service
- Jebel Ali: Covered by inducement of AE11 service
MSC, from its side, will introduce the Griffin service, operated as a single hybrid fortnightly service spanning a combination of Asia-Mediterranean and Asia-North Europe port calls.
The Griffin service is scheduled to start in the second half of June with the following rotation:
Shanghai – Ningbo – Yantian – Singapore – Tanjung Pelepas – Port Said – Rotterdam – Antwerp – Singapore – Ningbo
“The service is being deployed to ease ongoing supply chain disruption from the impact of Covid-19. However, it will only sail if demand is gradually growing,” stated the Swiss-based company.
Clearly the lines are uncertain about the level of demand that they will face in the third quarter. It is a factor of this crisis that the unpredictability of events makes it nearly impossible to predict what the situation will be in a month’s time. But the lines are clearly intent on maintaining rate levels with the latest announcements to protect their bottom lines.
Antonis Karamalegkos Nick Savvides
Editor Managing Editor