Box Line "Predatory Pricing" Undermining Rates

Spot rate losses by carriers are self-inflicted and will undermine annual Asia-Europe contract negotiations with shippers later this quarter, believes one leading analyst.

Entering the fourth quarter, it was clear that the introduction of new IMO 2020 low-sulfur fuels, a rise in oil prices following drone attacks on Saudi oil fields and the ongoing U.S.-China trade war would prove disruptive, with carriers expected to continue their strategy of heavy blanked sailings to prop up rates during the traditional slack season.

However, analysis by Drewry claims some lines, certainly on Asia-North Europe trades, have misjudged the market this year, undermining their own efforts to generate profits. It points to ample evidence that carrier rate cutting has resulted in them missing out on the benefits of stronger than expected demand growth.

"The disconnect between supply and demand fundamentals and freight rates is indicative of a return to predatory pricing on the part of some carriers within the trade, undermining the positive demand story," said the analyst in a note.

"Unless lines match pricing discipline to that shown for capacity it will be for nothing."

Drewry's case is persuasive. Westbound demand on the Asia-North Europe container trade has exceeded expectations this year, a trend that should have helped to counteract the influx of big new ships and maintained load factors at roughly the same levels as last year, in the mid-80% range.

Headhaul demand on Asia-North Europe trade was up by 5.9% in the first eight months of the year, according to data from CTS. This compares to the 2.9% annual growth registered last year.

"The trade appears to be benefiting from trade diversion related to the U.S.-China trade war, with Chinese exporters looking to Europe to fill the shortfall of U.S. traffic," noted Drewry.

Even though growth has slowed in the second half of the year, westbound volumes still expanded by 3.4% and 3.8% in July and August, respectively, and Drewry believes lines enjoyed 12-month rolling growth rates of nearly 6% through August.

However, despite the positives, spot market freight rates have not recovered from a first-quarter slump and are currently tracking at their lowest levels this year. The Freightos Baltic China/East Asia to North Europe 40-foot container index dropped 1.15% in the week to Oct. 13, for example, while the Freightos Baltic Daily Index tracking the cost to ship a box on the China-to-North Europe route (SONAR: FBXD.CNER)  is down 17% year-on-year, and the Freightos index covering the China-to-Mediterranean lane (SONAR: FBXD.CMED) is down 6% year-on-year.

More concerning for lines, a number of analysts, including Maritime Strategies International and Alphaliner, have predicted rates will slip in the coming weeks as demand tapers.

For its part, Drewry believes the demand up cycle enjoyed on the trade for much of the last 12 months is now drawing to an end. "The third-quarter peak season did not witness any rolling of containers and given the amount of capacity that is being withdrawn it would appear that the lines themselves are not expecting any cargo surge," it said.

Drewry noted that while liner capacity retrenchment has helped westbound utilization gradually rise since February, spot market freight rates have not responded positively. "There was clearly an element of rate cutting going on and if that hasn't been eradicated, lines are unlikely to realize the full benefit of the planned capacity reductions," Drewry added.

With both demand and spot rates expected to be tepid in the coming weeks, lines will be at a disadvantage in Asia-Europe annual contract negotiations with shippers.

"The concern now among carriers must be that with the annual beneficial cargo owner service contract negotiations looming on the horizon, whatever gains are made in terms of higher bunker surcharges will be negated by lower ocean rates for 2020 contracts," concluded Drewry.

The only positive? "An earlier Chinese New Year, beginning Jan. 25, might offer some assistance to contract negotiations by boosting activity in December," said the analyst.

FreightWaves articles by Mike

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