Container lines are thwarting their own efforts to push through higher freight rates.
The Shanghai Containerized Freight Index, a measure of prices for cargo leaving the world’s busiest port, has dropped 7.6 percent since May 4. It had risen 58 percent in the first four months of the year after A.P. Moeller-Maersk A/S (MAERSKB), owner of the world’s biggest container line, and other carriers implemented price increases.
Maersk and rivals such as Hapag-Lloyd AG and CMA CGM SA lost money last year as high fuel costs exacerbated a price war. In addition to raising freight rates in response, they pooled or idled ships and reduced speeds to curb vessel supply. The decline in the index indicates those price increases are reversing as ships are added back to the world fleet.
“Somebody of the 15 lines contributing to the index must have undercut the jointly established higher freight rates,” said Kai Miller, head of the container desk at London-based ship broker ICAP Shipping. “More general rate increases were announced for the summertime, but that is now a big question mark.”
Flagging European trade, too many container ships and signs that container companies are turning to rate cuts should prompt investors to stay away from shares in A.P. Moeller-Maersk, Frans Hoeyer, an analyst at Jyske Bank A/S in Silkeborg, Denmark, wrote in a May 21 note. Hoeyer advises investors to reduce their holdings of Maersk stock.
A.P. Moeller-Maersk shares are down 7.1 percent this year, compared with 4.1 percent for the Europe Stoxx 600 Index. (SXXP)
Container lines normally make money in the three months starting Aug. 1, when U.S. and European retailers stock up on consumer goods for Christmas. The extra demand typically allows shipping companies to add a peak-season charge. Last year, though, customers were able to negotiate that increase away as overcapacity destroyed container lines’ bargaining power.
“If rate increases fail two peak seasons in a row, it would be very negative for the industry and would lead to Darwinist selection among the operators,” said Marco Vetulli, a senior credit officer at Moody’s Investors Service in Milan. “There’s a real risk that freight rates could decline rapidly if the demand and supply balance isn’t right when the peak season comes.”
Moody’s has a negative view on the shipping industry as margins come under pressure because of high fuel prices and “a sustained oversupply of vessels” in 2012, Vetulli said.
“Spot freight rates have peaked and will soften through the second half of the year,” Drewry Maritime Advisors said in a note distributed May 31. “Carriers will continue to push for higher rates. But the success of these attempts will diminish and prove short-lived.”
Some of the rate increases implemented by the world’s largest container lines in May, including Maersk, have been rolled back and the planned surcharges have been postponed, said Lars Jensen, head of Asia/Europe trade at Maersk Line. Still, the Danish company has utilization rates on its ships from Asia to Europe “in the mid-90s” percent range and expects that “to hold up fairly strongly,” he said in a telephone interview from Copenhagen.
“The implementation of the peak season charges that most lines had planned for early June seem to have moved to mid- June,” Jensen said, adding that Maersk Line plans to introduce its seasonal surcharge on June 15 rather than on June 1 as originally planned. “It all depends on supply and demand, but we are reasonably optimistic as far as the summer is concerned.”
Nils Smedegaard Andersen, chief executive officer of A.P. Moeller-Maersk, said on May 16 that rates need to continue to increase if his container line is to break even or become profitable this year.
The Shanghai freight index reflects spot cargo rates charged and provided by 15 carriers and 17 so-called freight forwarders. The spot rates are the prices for immediately available cargo, and don’t include longer-term contracts between container shipping lines and their clients. Lower spot cargo prices are reflected in a decline in the index.
New ships with a capacity of 400,000 standard containers were added to the market in the first quarter. That figure will grow to 1.2 million at the end of 2012, according to BIMCO, the world’s largest international shipping association. At the same time, lines have put almost 40 percent of the ships they had idled back into service, BIMCO estimates.
“When rates improve, container lines are quick to add capacity and that creates a ceiling as to how much rates can recover,” said Peter Sand, a Bagsvaerd, Denmark-based analyst at BIMCO, whose members control 65 percent of the world’s tonnage.
Still, with current rates on the Asia-Europe route at about $1,700 per 20-foot container, operators may yet end the year with profits Sand said. Break-even levels are slightly more than $1,000 per box.
“The rising fuel costs are affecting all liner companies,” Hamburg-based Hapag-Lloyd said in an e-mailed response to questions. “The announced rate increases are necessary to recover these high bunker and other energy related costs from our customers. This holds true for all trades and not only for the Far East Europe trade.”
CMA CGM didn’t immediately reply to e-mailed questions.
Some container lines may have used the brief spell of higher rates and lower fuel prices to take market share.
Paris-based shipping data provider Alphaliner said in a note May 15 that there are “increasing signs of rate undercutting as rates have risen above break-even for most carriers.” Any failure to implement peak season surcharges “could have significant negative ramifications on the carriers’ attempt to return to profits this year,” it said.
“We noticed all major lines introduced higher rates for the summertime, as we had a very sharp increase in the index, but it was not maintained very long,” ICAP’s Miller said. “There must have been some market participants who thought about their own interests and went down in spot rates to fill their tonnage. There is always cargo fishing for the cheapest spot rate.”