Europe’s largest container lines are making an attempt to increase Asia-Europe rates to more than break-even levels and restore profit before year-end. Capacity cuts may boost their chance of success.
A.P. Moeller-Maersk A/S (MAERSKB)’s container line, the world’s largest, and Hapag-Lloyd AG, Europe’s No. 4 line, have announced a $500 per-standard-container rate increase from Asia to Europe starting Nov. 1. France’s CMA CGM SA, Europe’s No. 3 container company, will also increase Asia to Europe rates by $500 on that date, while Hong Kong’s Orient Overseas International Ltd. (316) has announced a rise of $525 per box.
Container lines are losing money on routes from Asia to Europe because of an overcapacity of ships and slumping demand due to the European debt crisis. That’s made it difficult for carriers to raise prices on the televisions, T-shirts and shoes they ship from China to such ports as Hamburg and Rotterdam. While efforts to increase prices in March restored profits, rates have since slumped to below break-even levels.
“This will be a major trigger for Maersk and other container share prices,” Frode Moerkedal, an analyst at RS Platou Markets AS in Oslo, said in a phone interview. “Utilization should improve and support higher rates.”
Container carriers such as Maersk Line, Hapag-Lloyd and Hanjin Shipping Co. have announced the removal of capacity of more than 30,000 standard containers between Asia and Europe in recent weeks. Coupled with the planned Nov. 1 rate hike, that may allow Maersk Line to achieve the full-year profit it forecasts for the year and help offset rising fuel prices in an industry in which all major container lines lost money in 2011.
A.P. Moeller-Maersk has declined 3 percent in the past six months, partly because of investor concerns over profitability on the Asia-Europe route. Denmark’s benchmark Copenhagen 20 Index has advanced 8.9 percent in the same period.
After the industry’s concerted effort to bring up prices starting March 1, the Shanghai Containerized Freight Index soared 54 percent between Feb. 24, the week before the rates were raised, and May 4. The increase didn’t stick: The index, which also includes rates on services to North America, remains down 22 percent from the May peak.
Still, the container carriers’ planned boosts and the capacity cuts may be too little, too late, according to Danish shipping Association BIMCO, which represents 65 percent of world tonnage.
While carriers “were able to stay on top of the game and adjust supply to the anticipated demand” in the first half of this year, they have now been “caught a little bit behind,” said BIMCO shipping analyst Peter Sand in a phone interview from Bagsvaerd, Denmark. “Demand evaporated much faster than anticipated during the summer.”
Rates between Shanghai and northwestern Europe stood at $1,074 on Oct. 19 and $1,076 for cargo shipped to the Mediterranean. Shipping lines need $1,200 to $1,300 a box to make money, according to Kai Miller, Hamburg-based head of the container desk at London-based ship broker ICAP. RS Platou sees cash break-even at between $1,250 and $1,350 per box.
“Worryingly, rates have still fallen in October despite a more than 20 percent reduction in capacity,” Miller said.
The total size of the global container fleet probably will grow 7.2 percent this year and 7 percent in 2013 as new ships ordered before the shipping industry’s crisis are completed, BIMCO forecasts. At the same time, Maersk forecasts a 3 percent slump in volumes between Asia and Europe in 2012.
Maersk Line said on Oct. 12 that it would remove 19 ships from Asia-Europe trade lanes. That will bring its total capacity cuts on the route to 21 percent this year after a 9 percent reduction in February. The G6 alliance, which includes OOCL and Hapag-Lloyd, said Sept. 3 that it would halt its Loop 3 service between Asia and Europe until further notice because of a lack of demand.
Hanjin Shipping and Evergreen Line said on Oct. 18 that they would reduce capacity between China and Europe by 23 percent during the fourth quarter and that they would consider further capacity cuts depending on demand.
Coupled with similar measures by the CKYH alliance, which includes China Cosco Holdings Co. (1919) and Yang Ming Marine Transport Corp. (2609), about 30,300 TEU, or 7.7 percent of the total fleet at the end of September, will be cut between Asia and Europe, RS Platou estimated.
Hildan and Moerkedal said capacity needs to be cut by 33,400 TEU to achieve the average utilization and freight rate of $1,400 per standard container registered in the first nine months of this year.
“We see a similar picture as during the spring when liners were able to bring rates substantially higher,” said Moerkedal. “Demand is likely to be weaker this time around, but given the substantial service cuts we believe $250 per TEU, or 50 percent of the rate increase, could stick.”
That may help Maersk and other carriers make a profit for 2012, following losses last year. Copenhagen-based A.P. Moeller- Maersk’s market-leading Maersk Line, which suffered a $372 million net loss in the first half of this year, said Aug. 14 it expected a “modest” full-year profit after carriers raised rates. The line posted a $227 million profit in the second quarter after rates were increased.
“We know this market is price-inelastic, so if we lower our rates, not a single box will ship more,” said Lucas Vos, chief commercial officer for Maersk Line, in an interview in Shenzhen, China, last week. “It’s not the first answer we should look at. The first answer is, can we have the right capacity in the market.”
Hamburg-based Hapag-Lloyd, which lost 139.7 million euros ($181 million) in the first six months of this year, said on the same day that further rate increases were “crucial” for it to offset rising fuel costs and post an annual operating profit.
“After a short and slight downturn in May and June, bunker prices climbed to previous peaks again and the actual rate level in the Far East trade is not sufficient,” Hapag-Lloyd said in an e-mailed response to questions about its announced rate increase. “If rate levels don’t pay the expenses of a transport, liner shipping companies will not be able to provide the service level customers expect from them.”
Even partial implementation of the targeted higher rates would make a difference, said BIMCO’s Sand.
“We are balancing on an edge right now in terms of break- even levels, being just on top or below depending on what container lines you refer to, as the break-even varies by a few hundred dollars between the most efficient and least efficient lines,” he said. “If rates rise by between $100 and $150 I think we’ll be back in the black, above break-even levels.”
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