Lower growth prospects in China and a sluggish eurozone economy could be the reasons for the reduced volumes of containers on the world’s busiest route. Hence major container shipping lines have been slashing sailings on the route between Asia and Europe.
The late summer season is usually considered as a peak time for the container shipping as the retailers gear up for Christmas sales. This duration is characterized by the movement of about 95% of the world’s manufactured goods. These goods include toys, clothing, electronics and household goods, which are relocated by container ships. But the lower demand and a glut of tonnage in the water is posing challenges to the major container shipping lines in recent years.
The G6 Alliance of Singapore’s APL; South Korea’s Hyundai Merchant Marine; Japan’s Mitsui OSK and NYK; Germany’s Hapag-Lloyd and Hong Kong’s OOCL have curtailed their 12 round-trip sailings from Asia to Europe, starting in September. This constitute about a sixth of the capacity that used to move normally on the route in a five-week period. Even the 2M alliances of Denmark’s Maersk Line and Geneva-based Mediterranean Shipping Company have shared their plans to withdraw about 6,500 containers from the route since August. This is just the about the 10% of its normal capacity.
Jonathan Roach, a container market analyst with London-based Braemar ACM Shipbroking, has confirmed the fear of dropping demand and estimated the overcapacity on the Asia to Europe trade loop at around 30%. According to him, the global container capacity is likely to increase by 8.6% this year whereas the demand is like to go up between 2% and 3%. This can put a lot of pressure on freight rates and compel the container lines to cancel sailings. Another official has also confirmed that falling economic growth and less demand for Chinese-made manufactured goods in the euro zone is also responsible for the reduced demand.
For 2015, the Chinese economy is expected to grow by around 7%, which is the weakest expansion in 25 years. Even the freight rates between Shanghai and Rotterdam have plummeted to a record low of $243 per container in June. This rate doesn’t even cover the operators’ fuel cost. According to data from the Shanghai Containerized Freight Index, the freight rates were temporarily boosted to $1,109 per container in July but again they dropped to $640. Operators felt that it is unsustainable if they operate below $1,300 making the only handful of companies profitable and rest into the red.
Container shipping is majorly regulated by about 15 European and Asian operators. These lines have pooled their operations through alliances, shared networks and port calls and by using ultra-large container ships. With these alliances, they have been carrying a capability of 19,000 containers making them third largest than the biggest ships of a decade ago.
Lars Jensen, chief executive of Copenhagen-based SeaIntel Maritime Consulting, commented that large companies like Maersk have an advantage of their size and moves more than 15% of all container capacity. This makes them less vulnerable than smaller competitors. Their businesses are dependent on the long-term contracts with big cargo owners at better prices. He said. “But if you are forced to pull out capacity from one of the major routes like Asia-Europe, there is no place to use the idle vessels because overcapacity is everywhere. It will be like shuffling the deck chairs on the Titanic.”
Image credit: ROLF SCHULTEN/BLOOMBERG NEWS
Source: Wall Street Journal