Shipping lines have learned the lessons of the substantial fall in demand experienced during the financial crisis in 2008/9 and have managed capacity in a much better way maintaining rates at an acceptable level and keeping vessel utilisation up.
The question now is can the lines maintain these levels as the pandemic takes hold in the demand economies of the US and Europe?
Utilisation rates on the headhaul legs of both the major trades on the Pacific and Asia to Europe have not fallen, but the cargo levels have as ships go into lay-up and some 435 sailings are cancelled the decline in demand has reached 7 million TEU, according to Sea-Intelligence.
At an average rate of US$1,493/FEU that is a total of US$5.225 billion in lost revenue for the lines. And even the savings through the cancelled services will not be as high given the collapse in the price of crude oil, which is mirrored in the bunker market.
Ocean Network Express (ONE) in its first quarter volume statement illustrated the point. On the Asia-Europe trades the company handled 443,000TEU westbound (WB) and 325,000TEU eastbound (EB). About 5,000TEU fewer containers than in Q1 2019, but where last year’s utilisation was 92 and 63% respectively in the first quarter this year the utilisation rate was 100 and 67% respectively.
The situation on the Transpacific trades is, if anything, even more pronounced. The company has reported an 80,000TEU decline in volumes on the Transpacific from the end of 2019 to the end of the first quarter this year. And a year-on-year decline of 42,000TEU. However, utilisation a year ago was 88% EB and 43% WB. In Q1 2020 those utilisation rates were 93 and 50% respectively.
According to Sea-Intelligence’s Sunday Spotlight publication, there have now been 435 sailings cancelled on various deep-sea trades, and this indicates a demand decline of 7 million TEU in 2020.
“This forceful response to the market downturn has thus far served as a strong underpinning for the freight rates though. Seen over the past six weeks, the CCFI contract rate index is 11% higher than at the same period last year – despite the drop in both demand and oil prices,” reported the Sunday Spotlight.
Simon Heaney senior manager, container research at Drewry Shipping Consultants, argues that the shipping lines have learnt a valuable lesson from the 2008/9 financial crisis which saw freight rates crash as more capacity was delivered and demand slumped.
“Carriers are more skilful at managing capacity these days, the approximate 25% decrease in capacity on various deepsea trades is commensurate with the reduction in demand,” Heaney told Container News.
Heaney believes that the carriers have three lines of defence for their cash flow and that the first line of defence is the cuts to sailings, the planned withdrawal of capacity effectively, which has been well documented and is ongoing.
According to Heaney the lines are now “more nimble” over the management of capacity than ever before because they are able to operate in three major alliances, which allows the carriers to streamline the capacity management process. It is this fact that angered shippers earlier this year when the European Commission renewed the liner operators’ Block Exemption, which allows the lines to manipulate capacity within their alliance groups.
Shippers groups wrote to the EC complaining of the regulators failure to take into account shipper’s view on the renewal of the Block Exemption.
Denis Choumert, chairman of the European Shippers' Council (ESC), which signed the letter with forwarders body CLECAT, terminal operators' body FEPORT, the European Tugowners' Association and the European Transport Workers' Federation, told Container News, that those opposing the extension had no further recourse open to them than to write to the commission registering their opposition.
However, Heaney believes that ultimately the shippers would have seen higher prices if the EC had not renewed the block exemption. “Shippers will worry about shortages of capacity, but the alternative to the block exemption would be that carriers go bust, that would leave a smaller pool of carriers to go to. Essentially there is an economic imperative to cut capacity,” said Heaney.
It would clearly be better if the lines could communicate earlier which services would be cut, because shippers struggle to understand the lines’ intentions, but the lines also have a problem because the situation, during the Covid-19 crisis, is fluid, and “no-one knows what the level of demand will be,” added Heaney.
However, Eytan Buchman, CMO, Freightos, believes that the alliances have taken different approaches to announcing capacity cuts with 2M and THE Alliance taking broadly similar attitudes and the Ocean Alliance furrowing a different path.
“The pattern is that 2M and THE Alliance have chosen an approach where they announce blank sailings ranging quite far into the future – typically to the end of Q2 – and then supplement these with a few additional blank sailings tactically as the situation evolves,” explained Buchman.
Whereas, the Ocean Alliance announces blank sailings for shorter periods into the future and it has “not yet announced much for the later period in Q2,” he said.
An example of this is on the Transpacific, the three alliances have each blanked some 17-24% of capacity in weeks 15-21. However for weeks 22-27 2M and THE Alliance have blanked 19-21% whereas Ocean Alliance at this point has blanked only 6%.
“Given how the pandemic is impacting the economy it should be expected that we will see more blank sailings emerge from Ocean Alliance in Q2,” added Buchman.
In Freightos’ view, “The removal of capacity through June shows carriers are not expecting global demand for non-urgent cargo to return for some time. Similarly, US and European ports are expecting a significant dip in activity, with some already closing some terminals.”
Drewry also said that the February utilisation rates were still showing that ships were full, but the expectation is that when the March figures arrive in the coming weeks the picture will have altered considerably.
“Paradoxically, ports in places like Los Angeles and the UK first have to contend with the surge of arriving containers sent after China’s rebound, but before Covid-19 spread and impacted demand in the West. Many of these arrivals will not be picked up by BCOs [beneficial cargo owners] in industries like retail whose demand has vanished for the time being, and the ports are hustling to find storage solutions until the shutdown ends,” writes Buchman.
Even so, Freightos says that in the last week freight rates on the Pacific fell 7% to US$1,493/FEU, which puts rates on a par with last year’s levels.
Drewry believes that the shipping lines have got the balance broadly correct with the barometer for the levels of capacity against the stability of freight rates.
More savvy shipping lines are also achieving capacity cuts through routing vessels around the South African coast, using more fuel, but fuel costs have also substantially diminished in recent weeks. This second stage defence has already been taken by French carrier CMA CGM which diverted one service, some weeks ago, but Drewry believes there will be more diversions on this route with carriers making savings on Suez Canal fees.
Though the trip for the cargo is longer, Heaney says they are “awash” with capacity so adding an extra vessel to maintain the weekly frequency will allow the lines to use up some spare capacity.
Drewry also expects lines to add to the suspension of entire services, there has already been talk of this move, according to Heaney, and if the downturn is prolonged then the expectation is that the lines will move to this stage three defence of their cash flow. This will also include furloughing staff as well as laying up vessels.
Whether the lines can ride out the pandemic and maintain critical levels of cash flow remains uncertain. Charter rates will still need to be paid for vessels under contract and owned vessels will require employment. Those costs will be offset to some extent by the decline in fuel costs.
Ultimately the lines will need to see a return to some sort of normality, but up to now carriers appear to have found a solution to major and prolonged falls in demand.
Freightos’ key insights:
- Ocean rates are falling (China-US West Coast at -7% since last week). Full rate collapse from lower demand was prevented by record removal of ocean capacity by carriers.
- Air cargo rates are still exceptionally high, especially ex-China, where Freightos.com marketplace data indicates yet another increase of 25 to 30% since last week. Europe-US rates seem to be levelling off: WebCargo data indicates a 1 to 2% decline in Europe-US rates since last week.
- Amazon is trying to relieve pressure by reducing order volumes, but their third-party sellers may be resilient in adjusting to Amazon’s changing policies. A week before restrictions on non-essential items for FBA (Fulfillment by Amazon) services were removed, Freightos.com data indicated that FBA shipments increased more than 50%, possibly indicating that FBAs were able to pivot to essential items quickly.