Maritime market updates

Hedging solution to freight rate volatility

With shipping lines all out to increase freight rates ranging between US$ 600-775 per teu from mid March on many routes, broker GFI Group said: “Looking at the rates available in the forward market today, shippers have the facility to hedge themselves against paying the full GRI in March by buying a derivative contract for April at roughly US$ 100/Teu premium over today’s rates.” Whilst the concept of freight rate hedge is new in container liner shipping, it has been argued that regardless of whether the GRI (General Rate Increase) sticks or not there is enough justification to hedge.

The reluctance on the part of the shippers is primarily attributed to the lack of competency to manage a derivative hedge. Even if you assume that shippers do have the competence to conclude a hedging contract the decision of when to do so is somewhat complicated. The complication is compounded by the fact that the industry still has a problem over what constitutes the “fixed rate”. Though rates are described as fixed, they are always subject to GRIs, PSS (Peak Season Surcharges), bunker adjustment factor, and currency adjustment factor, complicating the basis of the hedge.

Is Maersk losing confidence in China?

Maersk Container Industry (MCI) as reported in the Lloyd’s Loading List has surprised the shipping market by choosing to set up its second reefer box factory outside China. When the factory opens in December in San Antonio, Chile, it will be the first factory outside China producing insulated reefer containers. As explained by MCI spokesman: “The decision to build its second reefer box factory in Chile was due to change in trade flows. There is a huge amount of food exports from the West coast of South America and every year there is a significant shortage of reefers. Our calculation shows that placing the factory in Chile will save reefer owners US$ 1,400 because they won’t have to ship any empty boxes.” Whilst admitting that manufacturing in China has become more expensive, it appears that the main reason for choosing Chile was the change in trade flows.

Compulsory weight verification for containers

As at today, shippers have to provide an accurate weight of the container to be shipped on board a vessel. It has been discovered that numerous accidents both at sea or land was due to weight mis-declaration. There was an incident involving a small feeder ship in a port in North Africa when it started to list on departure due to mis-declaration of containers stacked on board. An UK P&I Club report has stated that as many as 20% of containers shipped worldwide are overweight. With higher stacks even bigger ships are at risk, crew are at risk from stowage collapse, dock workers are at risk from equipment tipping, highway transport may be unsafe and so on. In one incident in the Port of Darwin last year, a container supposedly weighing four tons fell 12 metres to the ground narrowly missing two dock workers. The container was found to weigh 28 tons and exceeded the crane’s safe working load. International Maritime Organisation (IMO) with the US Government is co-chairing a group that will propose amendments to SOLAS Chapter VI, where Containers Weight Verification (CWV) would be made mandatory though the implementation of which will be challenging and costly.

Record high container ship capacity

Profit growth in the shipping market is under sever threat with new container ships to be delivered in 2013 expected to surpass the historical high 1.57 million Teu of container ship capacity recorded in 2008. Alphaliner figures indicate that capacity to be delivered in 2013 stands at 1.6 million Teu with some owners pushing ship deliveries into 2014. The capacity addition in 2014 is expected to reach 7% extending the risk of oversupply for another year. Maersk CEO for North Asia warned that capacity problems in the global container market would have a negative impact on industry in 2013. “This year there should be 10-11% more capacity coming in as we expect 4-5% demand, we need to bridge the gap,” said the CEO. Due to weak trading conditions 37 ships amounting to 80,000 Teu was sent for scrap during January /February and a further 10 ships totalling 20,000 Teu are ready for scrap this month. If this trend continues the full year deletion would exceed 400,000 Teu which would be the highest level ever recorded.

On a positive note, container trade statistics reflect that West bound volumes on the Asia Europe trade lane increased by 2.5% year on year in January to reach 1.3 million Teu. It was last in February 2012 when volumes on the West bound trade increased by 7.8%. In the year 2012 the annual fall in West bound Asia-Europe volume was 4.8% year on year. The Institute of Shipping Economist and Logistics believe that January’s container volume increase was based on the surge in Asian factory production in anticipation of the Chinese New year holiday in February.

Further fall of Asia-Europe spot rates

With spot rates on Asia-North Europe trade declining by 14% since the end of January, the proposed mid March US$ 700 per Teu general rate increase is doomed to fail. The decision by CKYH Alliance to reactivate NE4 Asia-North Europe loop will escalate supply and demand imbalance woes. However, the G Alliance has decided against the resumption of the loop 3 service saying, “We anticipate the current supply and demand balance to continue and will not be reinstating the loop 3.” The bad news for shippers is that it appears that there could be another round of blanked sailings by the carriers as they struggle to cope with supply and demand imbalance.

Shippers concerned over expansion of G6 Alliance

The US Federal Maritime Commission (FMC) is yet to approve the request made by the members of the G6 Alliance to extend its Asia – Europe cooperation to cover the US East Coast trades. The plan which was filed with FMC on 1 February is expected to receive clearance within 45 days. The G6 Alliance is expected to deploy 50 ships in six services connecting Asia with three going via Panama and others transiting through Suez. The extension of services by G6 Alliance, would it result in six carriers having an extended grip on shippers or would it mean an advantage to customers through wider scope of service delivery.

Two shipping trade agreements to merge: Will shippers protest?

Shipping lines operating to and from USA through Transpacific Stabilisation Agreement (TSA) and Westbound Stabilisation Agreement (WSA) will merge into one agreement (TSA) and is scheduled to be completed by 14 April. The expanded TSA agreement will comprise 15 lines including the world’s top three. With the amalgamation of the two groups the members are permitted by law to discuss trade related matters, resulting in reduced overheads and control costs through synergistic efficiency. The amendment to merge has been filed with Federal Maritime Commission (FMC), which has already raised some questions. Though cargo interest has not raised objection to the new structure, the expanded TSA has reassured the National Industrial Transport League on possible impact on capacity and contracts, as reported in Lloyds Loading List. Discussion agreements such as TSA have anti immunity in the US but have been declared illegal in Europe where the European Commission removed carriers block exemption from competition law in 2008.



(The writer, a Maritime Economist, is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK) and a University of Oxford Business Alumni. He is also a NORAD /JICA Fellow. He can be reached via [email protected].)