Freight, new price ruling

Freight, new price ruling

The Freight Transport Association (FTA) says the European Commission’s adoption of new pricing rules for shipping lines will modernise the industry and bring it into the 21st century. As reported in Lloyd’s Loading List, the new legislation follows a three year EU investigation into price signalling the announcement of general rate increases which was highlighted by FTA. 

Members of the Association’s British Shippers’ Council first raised concerns about the uncompetitive behaviour in 2010 and a dossier was submitted to the Council to support the claims. The shipping lines involved agreed to significantly change their pricing behaviours, which is reflected in the Commission’s decision under Article 9(!) of Regulation 1/2003 declaring the binding the commitments offered by the lines most notably that they will cease to publish general rate increase announcements. 

15 shipping lines were involved in the EU enquiry and all agreed in February to cease announcement of general rate increase, instead publishing actual prices to customers on an individual basis. This was put to a ‘market test’ for a month to allow interested parties to comment before the Commission announced its decision. During the enquiry, the Commission made ‘unannounced’ visits to 14 shipping lines. In its preliminary assessment, it expressed concern that the practice of price signalling could allow the lines to explore each other’s pricing intentions and to coordinate their behaviour. 

As reported in Lloyd’s Loading List, the European Commission is closing its investigation into suspected illegal rate ‘coordination’ among 14 of the world’s largest container lines, saying commitments offered by the carriers to abandon General Rate Increase (GRI) announcements in favour of a new pricing model will make rates more transparent and increase competition. Following negotiations and market testing, the new pricing model is set to be introduced from 7 December. 

The Commission opened an investigation in November 2013 because of concerns the lines were using GRIs to coordinate pricing. Although the lines concerned, China Shipping and COSCO (which have since merged), CMA CGM, Evergreen, Hamburg Sud, Hanjin, Hapag Lloyd, HMM, Maersk, MOL, MSC, NYK, OOCL, UASC and ZIM deny any infringements, the Commission earlier this year offered to drop its investigation in exchange for a commitment from the shipping lines to significantly change their pricing behaviour in the future. 

After the lines in February agreed to cease to announce GRIs and instead publish the actual prices available to customers on an individual basis, there followed a period of consultation and analysis of the commitments. The Commission announced that it has ‘adopted a decision that renders legally binding the commitments offered by the 14 container liner shipping companies’. The commitments aim to increase price transparency for customers and to reduce the likelihood of coordinating prices the Commission said.

Container freight rates have ‘bottomed out’

Container freight rates are forecast to rise modestly over the next 18 months form the all-time lows reached recently, but this will not be sufficient to rescue the container shipping industry from substantial losses in 2016, according to the latest Container Forecaster report published by global shipping consultancy Drewry. It said liner shipping has had a torrid time so far in 2016 with spot freight rate volatility reaching unprecedented levels, while unit industry income had fallen to record lows. 

Drewry highlighted ‘distinct parallels’ between what is happening now and the depths of the 2008/09 global financial crisis. The leading research and consulting services firm estimates that container carriers collectively signed away $ 10 billion in revenue in this year’s contract rate negotiations on the two main East-West trades. With annual Transpacific contract rates as low as $ 800 per 40ft to the US West Coast and $ 1,800 per 40ft to the US East Coast, carriers have done exactly what they did back in May 2009 in a desperate attempt to retain market share, the analysis said. 

With first quarter headhaul load factors at around 90%, there was no logical reason for carriers to sign so much revenue away in one fell swoop. While spot rates on the core trades have significantly improved after the 1 July GRIs, it is still too early to say if carriers have suddenly changed their approach to commercial pricing. Drewry said the recent decision by the G6 lines to take a weekly loop out of the Asia-North Europe trade was a positive move. 

But similarly pragmatic and pro-active measures will be necessary across other sick trades if recent improvements are to gain momentum, it added. While the new alliance structures are bedding-in between now and April 2017, this work will take some time yet.

Asia-Europe rates, start to contract again

Following initially successful 1 July general rate increases (GRIs) on the Asia-North Europe and Asia-Mediterranean trades, average spot market rates from Shanghai fell, respectively, by 22.7% to $ 932 per TEU and 18.9% to $ 951 per TEU, according to the Shanghai Containerised Freight Index (SCFI), wiping out more than half of the previous week’s gains. With the era of the GRI coming to an end in December on the Asia-Europe trade, after the European Commission as expected this week formally closed its investigation into carrier price signalling by accepting commitments from container lines on price transparency, only Maersk Line and Hapag-Lloyd have so far moved to the new pricing structure, having announced proposed rates of $ 1,450 and $ 1,550 for each laden 20 ft. container respectively on 1 July. 

Meanwhile, rates on the transpacific trade last week held relatively firm, having jumped significantly on the back of peak season surcharges implemented at the start of July, slipping just 3.6% to $ 1,166 per FEU from Asia to US West Coast and by 3.2% to the US East Coast to $ 1,727 per FEU, indicating that capacity taken out of the trade in recent weeks is finally bringing some much needed stability to the market. 

Hyundai teams up with Maersk and MSC

Following the South Korean carriers’ completion of its financial restructuring, Hyundai Merchant Marine and 2M partners Maersk Line and MSC have signed a memorandum of understanding on the Koreans joining the so far two member alliance effective April 2017, pending regulatory approval. Hyundai’s particular strength is the Transpacific trade, 2M’s weakest point. Actually, in 2015 all three carriers lost volumes in the Far East-US West Coast trade, which itself shrunk too, by 4.5% year-on-year, Maersk Line suffered the most, losing no less than 273,000 TEU compared to 2014, or minus 24%. 

Yet, the Danes were still the largest of the threesome, with MSC coming second. All other things equal, the inclusion of Hyundai into 2M would give this consortium a market share in terms of carryings of 18.4%, up from the present 2M share of 13%. It is vehemently denied by both Hyundai and Maersk Line that the altogether surprising joining of the South Koreans would be a first step in an ultimately straightforward takeoverof Hyundai by the Danes, as reported by Dynaliners.

More ships for scrap

Over the first half of 2016, Dynamar counted 95 ships larger than 500 TEU having been sold for scrap, totalling 314,400 TEU. This is approximately the same number as in the whole of 2015 and even 50% more by TEU capacity. The highest number of vessels was demolished in the (previous) Panamax segment (25), a category in which in the near future, due to the recent opening of the enlarged Panama Canal Locks, much more scrapping activity can be expected. Most probably, in combination with the significant overcapacity, this year the demolition record of 2013 (477,000TEU) will easily be broken. 

The average age of the vessels was 20 years. The bulk of them (50 ships/153,800 TEU) were built between 1996 and 2000. The oldest one was a Jones Act veteran, dating back to 1977. The youngest one, the ‘Safmarine Meru’, was only ten years old, but despite its relatively limited damage due to a collision at Ningbo, its owner did not consider repairs economically feasible in the current market. 18 ships were built in 2001 or 2002.

(The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).)