“Deep-sea rates, meanwhile, have been on a downward slide”

July 18, 2006 by SwizStick  
Filed under Contract Logistics, Education, QuickNews, Seafreight, Supply Chain Management

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This is one of the basic points brought up in this Logistics Management article in that shippers can rest easy when it comes to ocean freight costs while all other transportation costs are rising because of over-capacity in the market; although the author does mention that rising terminal and other related costs are taking their toll on carriers as well as shippers.

The author starts by referencing the oft-quoted assumption that capacity has exceeded demand.

…the global supply of container ships has exceeded demand since last year.
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In the trans-Pacific, most analysts say, the growth rate for containerized imports this year and next will be well below that seen in 2005. And when demand for inbound capacity slacks off, rates are sure to fall.

We did a post on container shortages and a quote from an article in the May 8, 2006 edition of the Journal of Commerce that pretty much debunked this theory.

While the Journal of Commerce article was quick to point out that much of the added capacity had yet to come online and that analysts they spoke to also expected rates to fall, demand already rose a much higher than expected 13% in the first quarter of 2006 and ships were still running full, leading Chris Bourne, executive director of the European Liner Affairs Association to comment “Every Tom, Dick, and Harry came out with their forecast, and they got it wrong, and it damages us”. Shippers were indeed able to secure better rates this year, but so far ships have pretty much been running full, despite the prediction that capacity would exceed demand, hurting the carriers’ bottom lines.

Perhaps analysts are still correct in assuming that as extra capacity continues to come online that it will exceed demand, but they could be wrong again. Just last month TSA members announced that they were planning on raising peak season surcharges due to the growth in Asia-U.S. cargo that “exceeded even the most optimistic forecasts”. As the price of oil continues to rise, bunker adjustments (BAF – fuel surcharges) will occur.

The Logistics Management article quotes the number of new ships coming online, accurately explaining that many of these new ships may replace older ones, but then proceeds to explain that the net capacity will increase as a number of mega post-Panamax 8,000+ TEU vessels come online:

Even if most of those ships replace aging vessels, there will be a net capacity increase because many of the newbuildings will be much larger than the ones they replace. About 150 of the ships on order will have capacities of 8,000 TEUs (20-foot equivalent units) or more, Page notes. Few ports will be able to handle those giants, and those that can are likely to experience serious strains on their operational efficiency.

As we have mentioned time and time again, simply increasing capacity will not necessarily reduce cost. The few ports that can handle these larger vessels are already stretched in terms of their ability to handle larger ships and larger volumes of cargo, despite their preaching to the contrary. But don’t take my word for it. From this very article:

But it’s difficult, if not impossible, for them to control some of their biggest expenses. According to Vincent DelPrete, a vice president of sales for OOCL, rail, trucking, and terminal operations account for 40 percent of his company’s costs in North America. From 2004 to 2005, fuel costs rose 18 percent and terminal operating costs rose 14 percent. And just like shippers, ocean carriers are paying much more for truck and rail services, he said at a recent industry conference.

It remains to be seen how long the carriers will continue listening to the analysts and media expectations when it comes to pricing. On the one hand we are told that all this wonderful excess capacity will easily outstrip demand (it hasn’t so far), that future demand for this year and next will be well below 2005 levels, and that a good portion of this excess capacity will be in mega vessels with 8,000+ TEU capacities. On the other hand we know that ships for the most part have been running full this year, demand far exceeded everyone’s expectations, fuel costs are rising, terminal and other related costs are taking up ever larger portions of carriers’ budgets, and these 8,000+ TEU vessels which are supposed to bring so much efficiency to the arena will only be able to call on certain ports which are already over-burdened and congested which will only add to their problems. Capacity is just one small piece of the giant pricing puzzle – you put all the other pieces in place and things don’t look quite so rosy for the future.

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