Capacity hits the Pacific—but is it enough?

David Hannon -- Purchasing, 4/20/2006

Demand for ocean container shipping will remain strong, but as more capacity comes online, rates will slowly come down. Don't believe it? Ocean carriers reported collecting lower freight rates in their most recent quarterly financial statements, indicating capacity may be outstepping demand, especially in the all-important Asia-U.S. lanes. And the outlook calls for more capacity to come online in those lanes, which may provide some relief for buyers and shippers paying record-high container rates.

"For the last few years leading up to 2005, the ocean shipping market has been very carrier-friendly," says Tom Keene, vice president of the BDP Transport division of BDP International. "Carriers were enjoying 98-99% lift on their vessels and could get away with big increases, either in general rates or surcharges. But today, the pendulum is swinging in favor of the shipper. Capacity in some lanes is outpacing demand by as much as 7-8%."

In the fourth quarter of 2005, average freight rates for 20-ft containers moved to the U.S. from Asia dropped 1% to $1,878, according to Containerisation International. And average freight rates for 20-ft containers moved to Europe from Asia fell 7% in the fourth quarter to about $1,709 each. That is the second straight drop in rates after a fall of 2.8% in the third quarter.

London-based Drewry Shipping Consultants says container rates may fall as much as 6% this year as new capacity comes online.

Nippon Yusen K.K., Japan's largest ocean shipping line, said it expects lower freight rates in 2006 as more container shipping capacity comes online. "The biggest problem in our business is containers,'' Yusen's director Makoto Igarashi said in a Feb. 23 interview in Tokyo.

Orient Overseas CFO Nicholas Sims told reporters in Hong Kong recently, "Rates on Asia-Europe routes have been very soft during the first few months of the year." The company saw revenue per 20 ft container drop 1.2% in the fourth quarter.

And Neptune-Orient Lines (NOL) recently reported its first decline in weekly container volumes in nearly 2.5 years. David Lim, CEO of NOL, said in a report, "In 2006, more challenges are coming up. There is capacity coming in that can lead to (freight rates) softening in some markets."

To pre-empt this trend, NOL and the other members of the Far Eastern Freight Conference announced they were instituting a freight rate increase of $200 to ship a 20-ft container from Asia to Europe through the end of June. The members also plan to raise rates by $50/container moved to Asia from Europe until June 30.

A variety of ocean carriers have announced new service routes to meet demand for global sourcing and its logistics needs. Drewry forecasts that, between January and July, transpacific carriers will have added up to four Asia/West Coast of North America weekly services, as well as three all-water Asia/East Coast of North America weekly services. These new services, and the expected vessel upsizing/replacements are expected to result in year-on-year capacity increases of 15.5% in the transpacific trade by the third quarter, although this capacity growth percentage could moderate to about 10% by the fourth quarter.

Examples abound. In February, Matson began offering a weekly China to Long Beach, Calif. service, deploying its five most modern vessels to the lane. Wan Hai Lines this year also began a transpacific service between China and Los Angeles.

Also in February, Asia's largest ocean carrier Evergreen Marine of Taipei teamed up with China's state-owned Cosco Container Lines to launch a new service linking China with Southeastern U.S. Evergreen's president Arnold Wang, said in a statement announcing the service, "We believe that the West Coast may again suffer congestion in 2006 and so, together with Cosco, we are taking action now. This will allow our customers to revise their supply chain arrangements ahead of any possible problems that they may anticipate later in the year."

Shipyards in South Korea, which account for 38% of the global market, have a record order backlog of 980 ships, of which container ships account for almost half, according to the Korea Shipbuilders' Association.

Chinese yards have 20% of global orders for ships measured by cargo capacity, according to London-based shipbroker Clarkson, which puts South Korean builders at 35% and Japan's yards at 32%. Shipyards outside Asia have less than 10% of global orders.

Hyundai Heavy Industries, the world's largest shipbuilder, plans to finish 74 ships this year, of which 50 will be container ships.

Port infrastructure in China is developing but with bigger and bigger ships hitting the water, ports both in Asia and perhaps even more so in the U.S., may have difficulty. In fact, Keene points out that many of the largest vessels on the water are being assigned to Asia-Europe routes because European ports are better equipped to handle them. Drewry forecasts that the overall ship capacity in the Asia/Europe trade (including the Mediterranean sector) will increase by 17% between January 2006 and January 2007, due to the expected deployment of 87 new ships of more than 3,000 teus in this major route.

South Korea-based Hyundai recently delivered the Cosco Guangzhou to Costamare Shipping of Greece. China Cosco has leased the ship, which can carry about 9,450 20-ft containers, and is using it on routes between China and Europe. Costamare also is the customer for the four additional 100,000-ton ships that Hyundai Heavy will deliver this year.

Cosco Pacific is developing terminals in China and in December won access to Yangshan, a deep-water port outside Shanghai that would double the cargo capacity of China's premier commercial city by 2010.