Neil Dekker, head of container research for London-based Drewry, said interest in index-linked shipping contracts may grow this year because of continuing volatility in shipping rates and the possibility that rates may spike later this year.
Speaking about the latest edition of Drewry's Container Forecaster
publication in a video
posted on the company's Website, Dekker said Drewry has heard anecdotally that interest in index-linked contracts is on the rise by shippers and carriers.
Such contracts call for rates to be adjusted, for example, on a quarterly basis depending on the movement of an index. Dekker said they could help reduce confrontation between shippers and carriers when rates fluctuate.
Noting that transpacific freight contract negotiations usually occur in April and May he said interest in index-linked deals "will depend on supply-demand dynamic at that point."
Dekker said the recent link-ups between CMA CGM and Mediterranean Shipping Co., the Grand and New World alliances, and Evergreen and the CKYH, mean that together with Maersk Line shippers now have four major choices in the Asia-Europe trade lane, resulting in a "move to more commoditization in the industry."
He said the big increase in tonnage in the Asia-Europe trade greatly affected rates on that route: contract rates were more than $2,000 per FEU at the start of 2011, but by the end of the year, spot rates plunged to $800 per FEU. He noted whatever happens in the Asia-Europe trade lane also has a big impact on shippers moving cargo in the transpacific.
The supply-demand fundamentals in the transpacific "are looking a little bit sketchy" and some bigger ships are being cascaded out of the Asia-Europe lane into the transpacific. Although some transpacific strings were pulled out late last year, he said Drewry had identified seven strings that might be restored before peak season and add 32,000 TEUs in weekly capacity.
"If the carriers don't get decent rates on the transpacific trade this year, maybe $1,700 for the West Coast and $2,800-$3,000 for the East Coast, bearing in mind they are for a 12 month duration, the carriers will stand to lose a lot of money in the transpacific."
"Our view is that there will come time in the early part of the second half of this year where the carriers's cash will really start to run out. Although there is not a drive for carriers to pull ships from the market at the moment, there will come a time - July, August, September - where the carriers are really forced to idle more capacity."
He said carriers might be forced to withdraw about 1.2 million TEUs in capacity, about 8 percent of the world fleet, in the second half of the year to help drive up rates.
While the perception was that 2011 was a bad year, Dekker said global demand growth grew by about 6.5 percent, "not a bad performance." He expects demand will grow about 5.4 percent percent in 2012. He said there is stronger growth in the South America, Middle East, and intra-Asia trades.
Drewry estimates the container industry lost more than $5 billion in 2011, which Dekker said was brought about by a fight for market share by the three biggest carriers - Maersk, MSC, and CMA CGM - and the fact that capacity was not reduced until late in 2011.
He said it was difficult to tell if losses will continue if companies exit the business. In 2009, when Drewry estimated the industry lost $20 billion, there were no major failures, Dekker said. He noted some shipping companies are part of conglomerates or are state-backed. He thought it more likely small companies might fail or retreat into local services, the intra-Asia trade, for example, and exit major East-West trade lanes.
Aggressive merger and acquisition activity seems unlikely, he mused, because "the last time that happened back in 2005 with CP Ships and P&O Nedlloyd it left a bad taste in the mouth of the acquring companies." (CP Ships was acquired by Hapag-Lloyd, P&O Nedlloyd by Maersk). — Chris Dupin