Unsteady Alliances Threaten Pricing

Featured Photo

Source: http://www.benavest.com/

 

Moving close to 95% of all manufactured goods across boundaries, container shipping has traditionally always been controlled by extremely wealthy individuals, or sovereign-wealth funds. Yet as ports around the world face new operational challenges due to ocean carriers scrapping and restructuring their vessel-sharing alliances; terminal operators, carriers, and equipment providers are scrambling to develop a plan of cooperation so shipper costs don’t spring out of control. On April 1st, 2017, ocean carriers will reduce their alliances from four to three, drastically changing the vessel strings and port calls that will have a worldwide effect in the logistics industry. Overnight, US gateways will transform, with a huge shift in vessel calls, container volumes from port to port, and from terminal to terminal within different individual ports based upon “scale” and “efficiency.” As cargo interests will choose their cargo flow gateways with the fewest obstructions and the final bottom-line costs to their supply chains; container lines will pick terminals that are the most effective at handling the enormous vessels that are being deployed around the world. The Ocean Alliance will control 35% of the total Trans-Pacific Trade, THE Alliance will own 39%, and the 2M Alliance + Hyundai Merchant Marine (HMM) will own 17%. According to Alphaliner, the three alliances will control the lions share, at 91% of US trade volume.

 

Wall Street Framed

Source: http://www.wsj.com/

 

With many spot rates varying as much as 30% for beneficial cargo owners that book through non-vessel-operation common carriers, the ones that gun for the lowest rates have the highest chances of getting their cargo “rolled”, or be forced to pay above market rates when space is tight. Many anticipate a huge drop in rates after the Lunar New Year that came early on January 28th, 2017 as many carrier alliances have declared a plethora of cancelled sailings that will endure till March. Blank sailings on prominent East-West trades run the gauntlet with blank sailings announced from 2M Alliance’s Maersk Line & Mediterranean Shipping Company, G6 Alliance’s APL, Hapag-Lloyd, Hyundai Merchant Marine, Mitsui MOL, NYK Line, & Orient Overseas Container Line. Yet so far, at least Asia-Europe spot rates have seemed steady as the Lunar New Year took off this past weekend as factories closed for a two week long celebration.

 

With rates showing a $500 gain per TEU higher than it was a year ago from Shanghai to North Europe, and $357/TEU higher on Shanghai to Mediterranean rates, rate recovery has been considered relatively robust and declines have been considered slow compared to the rates from last year. Peter Sand, chief shipping analyst BIMCO states, “The container shipping lines will increasingly focus on reaping the benefits of consolidation and we will most certainly see their profits go up.”

 

Asia Europe Framed

Source: http://www.wsj.com/

 

As last year’s brutal season of low freight rates have all but destroyed container line profitability, we have seen a major line collapse with Hanjin Shipping, and a huge wave of consolidation throughout the industry as carriers merged and formed new alliances to simply lean on one another to survive. It isn’t a question of whether spot rates will fall in February, but rather, by how much and how severe the decline will be. As Asia embarks on their annual yearly celebrations, it is only a matter of time before BCOs and the logistics industry will get a true reading on spot rate strength, and developments of pricing will make its way to the 2017 service contract bargaining table.

 

Additional Information:

  1. Shipping Alliances Shore Up Industry, Unsettle Customers (WSJ)
  2. New Alliances Threaten to Raise US Port Costs (JOC)
  3. Global Shippers Sound Alarm on Alliances, Consolidation (JOC)
  4. Asia-Europe Spot Rates Steady as Chinese New Year Begins (JOC)
  5. Trans-Pacific Spot Rates to Signal State of Carrier Discipline (JOC)