New alliances bring uncertainty to a mature trans-Atlantic market
When the Maersk Kotka called at Charleston and Savannah on Jan. 30 and 31 on a Europe-U.S. Gulf-Mexico-U.S. South Atlantic rotation, there was nothing unusual about the service, but for one big thing: It marked the first call at those ports by a ship on the revamped trans-Atlantic TA3 service jointly operated by Maersk Line and Mediterranean Shipping Co. in the new 2M Alliance.
The two carriers in January started four Europe-North America services and two Mediterranean-North America loops, and also will operate direct services connecting the North American east coast with Italy and Spain, and a service from the Turkey area.
The launch of the 2M, together with the expansion of trans-Atlantic services by the G6 Alliance last year and plans by the Ocean Three Alliance to enter the trade at some point this year, will have a huge, yet unknown, impact.
Shippers and competing carriers alike are wondering what impact these new alliances will have on the trade. Will they add more capacity and put downward pressure on freight rates? Will competing carriers cut rates to maintain their market share?
Time will tell, of course, but for now, it may be difficult for carriers to nail down general rate increases, even though total vessel capacity on the trade hasn’t increased, unlike the other east-west trades.
“With Maersk and MSC finally getting their act together, and with the G6 and UASC and CMA CGM putting some new programs together, I think it’s going to be another tough year for the carriers to push through substantial GRIs, because they are all going to be concerned about keeping their market share,” said Alison Leavitt, managing director of the Wine & Spirits Shippers Association, which negotiates freight contracts for its members.
In actuality, of course, two factors that may offset each other will impact the overall rates shippers pay. Fuel prices, which are passed along to shippers in the form of bunker adjustment factors, are dropping as the price of bunker has fallen more than 50 percent in the last six months, to around $240 a ton.
At the same time, carriers are passing along to shippers the sharp increases they’re paying for the low-sulfur fuel they must use in emission controls areas in North Europe, the North American east coast and parts of the Caribbean as a result of International Maritime Organization regulations that took effect at the beginning of the year.
The 2M’s new trans-Atlantic services come on top of five new services the G6 Alliance launched last year between North Europe and the U.S. East and West coasts, which actually resulted in a shortage of capacity while they were being introduced.
As for 2015, “We do not expect to see that any additional capacity will be injected,” said Wolfgang Freese, president of Hapag-Lloyd (Americas), which is part of the G6 Alliance. Although the alliances may be adding larger ships to their service strings, they also will reduce the number of ships, which means there may be no net increase in capacity, he said.
“These alliances will probably result in less capacity being deployed on the trans-Atlantic and a rate increase,” said Andreas Krueger, senior vice president and head of Ocean Freight Americas for DHL Global Forwarding. “They will put in larger vessels and take smaller ones out, which, together with slow-steaming, will result in lower capacity.”
DHL Global Forwarding participates in the trans-Atlantic trade under the Danmar brand, which, as a non-vessel-operating common carrier, buys space from many of the carriers. Krueger estimates trade volumes will increase by 5 to 6 percent this year, with slightly higher growth on the westbound leg.
JOC Group Economist Mario Moreno forecasts containerized volumes on the westbound trans-Atlantic will increase 7.1 percent this year, after expanding about 8 percent last year, thanks to the strength of the U.S. dollar against the euro, improving domestic U.S. employment and falling prices of European imports.
U.S. exports to northern Europe are forecast to decline 3.2 percent, after growing 3.3 percent last year. Imports from the Mediterranean region are forecast to increase 8.2 percent in 2015, after growing 13 percent last year. Exports to the Mediterranean region are forecast to increase 4 percent this year.
Trans-Atlantic vessel capacity remained tight in 2014, in part because Hanjin Shipping abandoned the trade at the beginning of the year and APL and MOL suspended their joint trans-Pacific PA-2 string to the East Coast, which also provided some trans-Atlantic capacity. Those trans-Atlantic capacity reductions followed Zim Integrated Shipping Services’ departure from the trade in 2013.
“Based on that, we do not believe that any carriers that are not present in the trade will enter the trade in 2015,” Freese said.
Capacity could tighten further this year if another smaller carrier quits the trade, but for now capacity is rising because of the January launch of CMA CGM’s Liberty Solo service from North Europe to the U.S. East Coast, with five chartered ships capable of carrying 1,700 to 1,800 20-foot-equivalent units.
Unlike the Asia-Europe or trans-Pacific trades, freight rates have been stable on the trans-Atlantic as U.S. demand for European imports has grown, filling westbound ships almost to capacity at times. Load factors were strong on the headhaul to the U.S. East Coast. “We had to book anywhere from two to four weeks in advance to get space on the vessels,” Leavitt said.
Despite strong demand on the headhaul, port congestion in some North European ports and in New York and Norfolk ate into carriers’ results last year. “Service levels dropped due to congestion, and because of that, so has the attractiveness and profitability,” Freese said.
DHL’s Krueger said East Coast port congestion actually helped Danmar’s business last year because many of its largest customers turned to Danmar to find alternate routing for their containers. “We had a diversion plan to the north and the south of the East Coast early on because we anticipated this almost before the summer last year,” he said. “Everybody who was willing and able to divert — at a price — put their name on the list. Other ports were also nearing their capacity, too, so we had to watch that, too.”
Congestion problems in North European ports last year didn’t impact Danmar. Krueger expects a slight uptick in rates on the westbound leg this year, but little or no increases in eastbound rates. Danmar does business with its larger customers under annual contracts at fixed rates. It negotiates even longer contracts with some of its biggest customers with rate reopeners if rates move beyond certain thresholds. It charges spot rates for smaller customers.
Westbound spot rates from Rotterdam to New York climbed 1.3 percent over the last year to $2,268 per 40-foot container as of Jan. 15 this year, according to the World Container Index, but contract rates remained about the same as 2013. Spot rates on the backhaul from New York to Rotterdam declined 7.4 percent year-over-year, to $1,323 per FEU on Jan. 15 this year.
“Last year was a missed opportunity for carriers to push through GRIs because every vessel was sailing at 100 percent of capacity throughout 2014,” Leavitt said. She said carriers were stymied because of the many changes in vessel-sharing agreements and uncertainty over the P3 Network among Maersk, MSC and CMA CGM, which China ultimately rejected in June.
Carriers took capacity out of the trade and are finally ramping up again as new vessels are introduced and strings are updated. CMA CGM subsequently joined with United Arab Shipping Co. and China Shipping in the Ocean Three Alliance, which hasn’t revealed its plans for the trans-Atlantic.
Load factors on the backhaul were a lot weaker, ranging from 75 to 85 percent on the eastbound trade with North Europe, for most of the year, resulting in much lower freight rates than on the headhaul. Eastbound spot prices fell from highs of more than $1,400 per FEU to less than $1,200 by year-end.
They could weaken even more this year because of the decline in the euro against the dollar, which will make it more expensive for eurozone importers to buy U.S. goods. “With the weakening of the euro, that rate differential could open up even further,” said Lars Jensen, CEO of SeaIntel Maritime Intelligence in Copenhagen.
The weakening euro also will boost U.S. imports from southern Europe and the Mediterranean. Freight rates on that trade haven’t been as strong as on the North Atlantic trade because of the abundance of vessel capacity provided by transshipment to and from the large vessels on the route through the Suez Canal from Asia to the U.S. East Coast. Still, rates are expected to remain stable. “I expect the trans-Atlantic’s Mediterranean lanes to remain much more stable than the trans-Pacific because the cargo moving in this area is not as volatile,” Leavitt said.
Total vessel capacity deployed in the trade between North Europe and North America was stable from 2013 to 2014, according to London-based Drewry Shipping Consultants. It said carriers would have a difficult time increasing capacity on the stronger westbound leg while trying to manage capacity on the weaker eastbound leg.
Maersk and MSC have said the 2M only will add capacity in line with any increase in demand. “From our point of view, the alliances are effectively adding competition and the potential for better services and stable, if not lower, rates,” Leavitt said.
Hapag-Lloyd’s Freese doesn’t think the alliances will have any impact on rates. “The rates have been under pressure for some time. In our view carriers being members of alliances will not be trying to buy additional market share by putting pressure on rates,” he said. To the contrary, in fact, Freese said he expects carriers to secure rate increases throughout the year, starting with GRIs on the westbound leg in the first quarter.
Eastbound rates have bottomed out, he said, so carriers will be able to get moderate increases in the second quarter. “We expect the eastbound trade to start to grow moderately again,” Freese said. “We expect slightly better growth in eastern Europe and countries outside the eurozone.”
Hapag-Lloyd has a small volume of trade with Russia, which hasn’t been impacted much by sanctions on shipments of high-technology products related to its military action with Ukraine. “A larger volume impact has been felt by the Russian ban on imports of foodstuffs, which has affected our reefer shipments,” Freese said.
The trans-Atlantic is one of the only trade lanes where carriers haven’t cascaded large older ships from other routes that have seen the influx of more fuel-efficient vessels of up to 13,000 TEUs. The distances in the trans-Atlantic aren’t great enough to gain efficiencies by using larger ships, and carriers have been reluctant to destabilize one of the only stable trades.
But that could change. “My key worry is that the trans-Atlantic will be subjected to cascading of far too much capacity from the bigger trades, as we’ve seen on the route from Asia to South America,” Jensen said. “In terms of freight rates, it’s been fairly stable the past many years because there has been very little change in vessel size” from the average of approximately 4,500 TEUs.
“But I worry that carriers will start cascading vessels of 6,000 to 8,000 TEUs onto the trade simply for lack of other deployment opportunities,” he said. “That wouldn’t necessarily destabilize the trade if they reduce the number of services.”