Hike in Freight Rates Not an Option?

A hike in freight rates is not an option as ‘sub-economic’ rates on the main trade lanes are here to stay, it was concluded by leading shipping lines meeting at the TOC Americas conference in Cartagena.

Freight rates pegged below most carriers’ operating costs, good for shippers, bad for inefficient shipping lines, are likely to be par for the course as a result of the investments made by shipping lines in vessels with capacity of up to 18,000 TEU for the unforeseeable future.

“Carriers who are not the most efficient operators in a trade lane will be stacking up losses from now on,” says Poul Hestbaek, Hamburg Sud’s Senior Vice President for Latin America West Coast & Caribbean.

“It’s not actually a crisis it is just the new normal,” he says.

“The freight rate going forward will be the cost of the most efficient operator in the market plus a decent margin for operating. If you are not number one or two you will not meet your costs,” says Hestbaek.

“Freight rates continue to go down and they will continue to go down, which is fine as long as costs fall faster. We have been going back to our vendors and telling them that if we can drive the cost out of the system I would very happily pay for that.”

After stacking up collective losses of more than USD22bn over a painful seven-year period, shipping lines are turning up the heat on port operators, stevedores and inland logistic operators to drive operating costs down even lower.

Mega-alliances that promise to reshape service patterns and strengthen the hand of shipping lines further in negotiations with terminal operators are being introduced at a time when the world’s largest carriers are finally feeling a return to profitability thanks to the slot cost savings of super post-panamax vessels.

Lower slot costs, slow-steaming and the rationalization of services has helped 10 of the world’s top 25 container lines return to profitability in the first three months of the year, according to analysis published by Drewry last week.

Hike in Freight Rates Not an Option1

Mega alliances like the 2M tie-up between the world’s two largest shipping lines – Maersk Line and MSC on 21 services – approved by the Federal Maritime Commission– will deliver further significant cost savings according to Robert van Trooijen, Maersk Line’s Chief Executive for Latin America and Caribbean.

“2M is expected to deliver savings of USD300m-USD350m annually. That benefit of course will be going to shippers in one way or another.

It’s about improving utilization, it’s about employing the container efficiently, it’s about the VSA efficiencies about the way we provide services inland because you can save on maritime costs but if you can’t optimize your inland costs then in the product side you are not winning,” says Van Trooijen.

Hike in Freight Rates Not an Option2

Mario Aguilera, Logistics Director for Cartulinas CMPC, Chile’s largest pulp and paper producer, played down concerns about the impact of mega alliances on pricing or reduced competition for his business.

The alliances, he believes, are unlikely to outweigh urgent need to fill a new building program that has thrown supply and demand off track for years to come.

“As a client, are the mega alliances going to be good? The answer is probably ‘yes’. While they are more efficient in the services they provide, it’s much better for me,” says Aguilera. “The megaships are an irreversible decision. The mega alliances are not.”

The main impact of the current round of commercial tie ups and the industry push for lower slot costs, he said, was to put an end to the historically low barriers of entry to the container shipping industry.

“The megaships and the mega alliances are a way of saying that if anyone else wants to come into the industry it’s going to need a very high investment,” he added.

The days of being able to negotiate with niche carriers were gone, something that has been underlined in Chile in the last 12 months with the respective acquisitions of the country’s two largest shipping lines, CSAV and CCNI, by German rivals, Hapag-Lloyd and Hamburg Sud.

“Small niche carriers really don’t stand a chance. Most carriers need partners to stay in the game,” says Howard Finkel, Executive Vice President Trade Division, Cosco Container Lines Americas.

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