Ocean carriers’ plans to get rid of surplus 8,000 teu vessels by dumping them into the tradelane between Asia and the East Coast South America appears to have seriously backfired, and painted them into a corner.
The recent launching of MSC’s new Ipanema service in the middle of April, and the subsequent announcement of the deployment of much bigger 8,000 teu vessels by others, will result in a massive 33% increase in capacity between April and July.
Even before all of the plans have been implemented, they have triggered a rate war, with spot prices from Shanghai to Santos collapsing by 26% between April and May, down to $2,810/40ft (including THCs at both ends), according to Drewry’s Container Freight Rate Insight. Anecdotal evidence indicates that since the middle of April, the decline was even higher, and rates were still dropping in the first week of June, indicating that no one wants to be muscled out of market share peacefully.
Freight rates between Shanghai and Santos ($/40ft)
The additional capacity causing this problem comes from MSC’s new Ipanema service, in addition to the current upgrading of vessels deployed in Evergreen/Coscon/Zim’s ESA schedule (from an average of 6,212 teu to 8,500 teu), and the rationalisation of the three services offered by Maersk Line, CMA CGM, Hamburg Sud, CSAV, CSCL and Hanjin. From July, the three services will deploy 33 vessels averaging 8,000 teu instead of 35 vessels averaging 6,295 teu.
The following table shows in more detail what existed at the beginning of April, before the introduction of MSC’s Ipanema service, and what is planned once all new services have been established in July. No allowance has been made for wayport cargo.
Although MSC appears to be at a distinct disadvantage to most other carriers in terms of economy of scale, the small vessels used in its service have been chartered at a very attractive rate of around $6,000/day, so the sub-economic state of the charter market is being used to its disadvantage. Its new service could also be a forerunner of a much bigger affair deploying 8,800 teu wide-beam vessels already on order.
Comparison between weekly direct Asia-ECSA services, April and July 2013
Cargo growth cannot be the main driver behind the changes in services. As shown in the following chart, although there was year-on-year growth of 4.7% from Asia to ECSA in 1Q 13, up to 343,000 teu, and 12% on the backhaul leg to Asia, up to 132,600 teu, the increase was spread over 12 months, whereas the planned 33% growth in vessel capacity will be accomplished within just three months.
Brazil, the powerhouse of South America, achieved only 0.6% GDP growth in the first three months of the year compared to the previous three month period. And with inflation now running at 6.5% per annum, President Dilma Rousseff is in the uncomfortable position of having to raise interest rates again to bring spending down to a more responsible level.
Trade between Asia and East Coast South America (’000 teu)
The country is additionally being held back by congestion caused through inadequate transport infrastructure. Port reform is only now being addressed. According to a recent report from Maersk Line, containers are now even being used for bulk commodities, such as soy and corn, to skirt round logistics problems in Santos.
The additional vessel capacity planned for July between Asia and the East Coast of South America will result in further freight rate erosion. As much as ocean carriers would like to hide surplus 8,000 teu vessels in the north-south tradelanes, this cannot be achieved in the current poor economic climate without creating overcapacity and rate reductions.