Supply-Demand Balance to Become More Stable

By MarEx 2014-08-05 12:10:00

Bigger consortia and alliances enable ocean carriers to sweat their assets more efficiently, but there is also an opportunity to better fine tune vessel capacity to seasonal cargo demand, which will probably be seized.

Although the main benefit of mega-alliances is to reduce operating costs, those currently in the making also provide ocean carriers with an opportunity to better match supply and demand, which they are likely to seize.  As explained in ‘Consortia and alliances set for further expansion’, just four carrier groupings could control 98.5% of all effective vessel capacity from Asia to Europe by the beginning of next year, for example, making it easier to fine tune vessel capacity.

The need to regularly adjust vessel capacity to meet seasonal cargo demand is highlighted in Figures 1 and 2, and should not be underestimated. Not only the winter season is involved.

Figure 1
Asia to WCNA Cargo Seasonality (’000 teu)

Source: Drewry Maritime Research

Source: Drewry Maritime Research

Figure 2
Asia to North Europe Cargo Seasonality (’000 teu)

Source: Drewry Maritime Research

Source: Drewry Maritime Research

A drawback of vessels getting bigger is that withdrawing whole services during the winter season has become too ‘chunky’, particularly between Asia and Europe – hence the trend of cancelling sailings instead. Obviously, the bigger an alliance or consortium, the smoother the schedule disruption caused by an omission, and the more alternative sailings there are to cater for roll-overs etc. Moreover, port calls of other services can also be rationalized to help out.

But even this is a messy business. Most exporters want a steady supply of vessel capacity, and cannot easily adjust production just to meet ocean carriers’ requirements, so may not always wait a week for the next sailing. The problem is that if the next carrier in line has also cancelled a sailing, panic could set in.

Capacity management between alliances and consortia to avoid this is illegal, but it does not prevent members from looking over each other’s shoulder to see when sailings cancellations are announced, or capacity added through vessel upgrading, in order to avoid duplication. It can happen now, and probably is, as ocean carriers have already become better at fine tuning capacity this year, and the process could become even easier in future due to a reduction in the number of players involved.

There is still much stabilization required, as indicated in the continuing volatility of the spot freight rate market (see Figures 3 and 4). Spot freight rates are, of course, not only determined by the balance between supply and demand, but it is an important ingredient, making the way prices change a useful indicator of imbalances.

Figure 3
Spot Freight Rate Volatility from Hong Kong to Los Angeles ($ per 40ft)

Source: Drewry's Container Freight Rate Insight (www.drewry.co.uk/cfri)

Source: Drewry’s Container Freight Rate Insight (www.drewry.co.uk/cfri)

Figure 4
Spot Freight Rate Volatility from Shanghai to Rotterdam ($ per 40ft)

Source: Drewry's Container Freight Rate Insight (www.drewry.co.uk/cfri)

Source: Drewry’s Container Freight Rate Insight (www.drewry.co.uk/cfri)

In theory, if alliances get better at matching supply and demand, this means that freight rates should become more stable too. But carriers’ tendencies to reduce rates to fill ships, and the fragmentation of the market between many competitors, run counter to price stability.

Better capacity management within larger consortia and alliances will be further encouraged by the need to restore the pace at which operating costs are cut. Figure 5 shows the way that it has declined since 2008 on a per teu basis. The introduction of slow streaming is 2009 and 2010 was always going to be a hard act to follow, and has since been only partially replaced by improved economies of scale through the deployment of more ULCVs and bigger alliances.

Figure 5
Carriers’ Operating Cost per teu Between 2008 and 2013 ($ per teu)

Source: Drewry Maritime Research

Source: Drewry Maritime Research

For the sample shown, deep-sea carriers’ average operating costs even increased by 7% in 2011, from $1,240/teu to $1,327/teu, mostly due to a 40% increase in fuel price, followed by another 1% in 2012, when average fuel price rose by 4%, but then fell by 7% last year, partly due to a 6% drop in fuel price (see Figure 6).

Figure 6
Comparison of All Carriers’ Average Operating Cost and Fuel Price

Source: Drewry Maritime Research

Source: Drewry Maritime Research

Reduced fuel prices are unlikely to come to ocean carriers’ rescue again after the end of this year now that the worst days of the recession are over, and further eco-taxation on fuel is due from the beginning of 2015 – which makes the need for further cost cutting action imperative, considering that most ocean carriers have already been losing money for too long.

Ocean carriers can, of course, continue reducing speed to cut operating costs, and will do so (for latest example see ‘N/S Supply/demand: Europe-ECSA 27th July 2014‘), but the risk of losing market share is high if others don’t immediately follow.

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The balance between supply and demand in the headhaul direction of East-West trades should be better managed by carriers next year due to the introduction of bigger alliances and consortia.