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Anything you can do, we can do better. And other themes in Container shipping this week

By • Dec 11th, 2011 • Category: Containers

The Coracle Container market podcast for Dec 9, 2011 in association with GFI

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Thank you for downloading the container market report from Coracle Online and GFI for December 9th 2011. This report will look at the derivative and physical markets.

We start with the paper market and the Shanghai – NW Europe route where we saw some interest in the prompt months this week, especially for the Jan 12 period, as market participants were trying to anticipate when, if any, a PSS would be implemented. The back end of the curve remained largely unchanged. On the Shanghai – USWC route the prompt months of the curve fell marginally in value this week, in line with the drop in this week’s index. However, given the uncertain market outlook, the back end of the curve hardly moved.

ON the Physical market and the Asia – Europe route and with only a week left before the round of PSS’s are supposed to be applied (starting with UASC PSS of $200/teu on 16 Dec), there is growing market scepticism towards whether there will be an implementation at all leading up to the Chinese New Year. Despite a number of carriers reporting high utilisation levels (over 90%), shippers and freight forwarders are citing that they are having no trouble in booking space over the coming weeks. Given that the timing of the PSS announced by all carriers is so spread out, it is evident that there is uncertainty amongst the carriers as to when they can implement it. Industry participants expect that even if a PSS could be implemented, it would be in January. MSC and CMA CGM appear to be the only two carriers who have publicly announced a PSS effective 1 Jan 2012 on the Asia – North Europe trade lane, whilst other carriers are seeking to impose one sometime during the last two weeks of December. As long as there is space, customers have said that they are reluctant to pay a PSS or any other form of surcharge in the current environment, even if they deem rates to be unsustainable.

On the Transpacific route Chinese exports account for more than 40% of US imports and speaking with a number of Chinese manufacturers this week, all have highlighted a sharp drop in export orders, especially in the second half of 2011. Some manufacturers are shutting their factories a week earlier before Chinese New Year next month as there are simply too little export orders. Whilst utilisation rates are faring better than the Asia – Europe route with carriers sailing at 85-90% levels, there is simply not enough demand growth to compensate for the additional capacity in this trade lane. Forwarders are still able to procure at rates of $1200/TEU (factoring a volume discount) and many expect rates to remain little changed until the end of the year. Similar to what we saw in Q3 this year, most industry participants expect only half the Rate Recovery Initiative (RRI) announced by the TSA effective 1 January 2012 to be implemented. With more discipline from the carriers on the Transpacific, this is more likely to go through than the Asia-Europe PSS.

Do you remember the school song that went: Anything you can do / I can do better / I can do anything / Better than you / Anything you can be / I can be greater / Sooner or later / I’m greater than you.

Well it seems like that’s tune being sung by the liner companies at the moment. Let’s take a look at some of the quotes and statements issued by the top 3 carriers this week and how they can be interpreted:

MSC and CMA CGM are telling customers that they will beat the transit times of Daily Maersk on 95% of port pairs. The two will be offering “a true reliable alternative to Daily Maersk” A case of, anything Maersk can do, we can do better and we are going to do it better than Maersk.

“Our Daily Maersk promise is the cornerstone of our product offering and has in a very short period become extremely popular with the customers. Therefore, it will of course remain unchanged and our customers will continue to enjoy the absolute reliability of our network,” that’s a quote in Lloyds List from Vincent Clerc of Maersk. Or, no you can’t says Maersk to the new MSC/CMA-CGM alliance!

“We are very confident that our products will keep setting the benchmark in the trade by offering the best coverage, highest frequency, ease of business and reliability in the market. We aim to keep anticipating our customers’ needs and keep being their carrier of choice in the Asia-Europe trade.” Again, Vincent Clerc of Maersk or, we can interpret as , sooner or later, I’m greater than you.

So let’s turn our attention to the recently announced CMA-CGM and MSC alliance offering. What we are seeing right now in the container industry is sheer Darwinism. Prior to 2008, carriers operating in the European trade lane were partially sheltered to free market forces by a Conference system. Carriers differentiated themselves through service offerings from their competitors. Fast track three years to 2011, since the abolition of the Conference system and carriers seem more focused on using price to differentiate themselves from competitors. This is a function of both greed and fear. Fear of losing market share and survivability. Greed for greater market share and volumes, at all cost. Similar to many other industries with two dominant players e.g. Apple and Microsoft; Anglo America and Rio; Toyota and General Motors; the one in the number two position has one goal: to become number one and this is clearly what MSC is doing.

Now the fight for market share has steered a different course between the industry’s largest players (Maersk vs. MSCCMA). As Alphaliner highlighted this week, the new alliance will give MSC/CMA-CGM 22% capacity share based on current capacity, which is still behind Maersk’s market share of 26%. However, Maersk will see its market share erode in 2012 as no large vessels will be delivered whilst MSC and CMA-CGM combined will receive 21 ships of over 13,000TEUs during the course of next year. The market is certainly not expecting the market share war to end next year. The competition for cargo volumes on the Asia – Europe route will only be intensified. Consolidation has started in container shipping and this will only decrease a carrier’s abilities to differentiate on service. How will MSC and CMA-CGM be able to differentiate on service, which leaves price as the key differentiating point?

With Shanghai – NW Europe Cal 12 trading at a 92% premium to the spot market, it would be prudent for carriers to hedge part of their exposure for next year. As we mentioned last week, demand will have to grow in excess of the 5% increase in supply next year and for now, in the current economic environment, it would appear to be a bit too idealistic.