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Fuel costs, competition put squeeze on shipping
26-08-2008
SINGAPORE – The global container shipping trade is in a conundrum. Rising oil prices have increased bunker costs, but fierce competition continues to dampen freight charges. In response to strong demand for space last year, shipping lines increased capacity on the Asia Pacific and Asia-to-Europe routes. The only exception is the trans-Pacific route from Asia to the United States, where shipping companies are plagued with a shortage of containers.
But foremost in the minds of shipping executives is the sharp increase in the cost of bunker fuel. "We believe that, in the foreseeable future — into the next 12 months — international fuel prices will be well above US$100 per barrel," says John Lines, Chief Executive of ANL, a subsidiary of the huge French conglomerate, CMA CGM Group. "We are very badly affected. Our bunker spend has risen almost 100 per cent, from $US50 million to $US100 million, in the 2008 financial year.
"The only way you can deal with the higher cost is to look at opportunities to slow-steam or to add an additional ship to the schedule to slow the rest of the fleet down. By dropping your speed back, you can probably save up to 30 tonnes of fuel a day. The savings will depend on the size of the ship and the individual route."
Lines says another option is to look at whether ports can be cut from a service. "If a ship is delayed, rather than speeding up the ship, you will find that shipping lines now cut ports. This is happening more and more.”
Unable to lift their base rates to reflect the higher cost of operations, shipowners are adding a bunker surcharge to help offset fuel costs — as airlines and cruise ships have done. "But we are not recovering the full additional cost,” says Lines. “On average, there is only a 60 per cent recovery."
He adds: "Bunker costs are still going up, our base rates are falling, and there is a time lag before the bunker surcharge flows through."
Surcharges in July ranged from US$472 per 20ft container and US$590 per 40ft container on Asia-to-US routes; US$610 for 20ft container and double that for 40ft containers on the Asia-to-Europe routes; and US$600 and US$1,200 respectively on the Australia-US service.
Lines says these charges have been agreed among members of the peak shipping bodies.
While he has not seen a transfer of freight from airlines to shipping, he believes it will come eventually — if oil prices stays high.
Lines says container freight charges have been held down by fierce competition among shipping lines. New services are being introduced into sectors like the Australia-Asia routes, resulting in increased capacity.
For example, the base freight rate per container on the Australia-China trade has fallen by US$200-US$300 in the past 12 months. "All carriers on the North Asia-Australia trade are losing a lot of money at the moment," Lines says. In response to buoyant trade, the Taiwanese shipping company, Evergreen, has introduced a new service to Australia. And a Korean-led consortium, including Hanjin, and the Chinese line, Sinotrans, have also begun plying the Australia-North Asia route.
As well, he says, existing lines have increased capacity. China is a growth market and newcomers have taken the opportunity to enter the market while the Australian economy remains strong and there is tight capacity. As is always the case, he says, the market goes from feast to famine.
ANL itself began a new Fremantle-Singapore-Port Klang service in July. It has two vessels on a fixed weekly service.
Lines says the service was introduced in response to demand for cargo space from Fremantle into Southeast Asia.
As an alternative to expensive and hard-to-find space on bulk carriers, some innovative grains exporters have begun exporting grain in containers. "They can move smaller lots into the market, and, particularly, into Southeast Asia,” Lines says. “Some of the markets don't like bulk ship loads. They want smaller quantities, and container shipping is well suited for that."
Asia-Europe is under pressure because of over-capacity, but the US trade is holding. "Shipping lines withdrew from the trans-Pacific trade. But with a weak US dollar, US exports have picked up,” says Lines.
"We have a problem of not being able to get enough containers to meet cargo demand. And the good thing is that freight rates from the US to Asia have gone up, in some cases by 100 per cent, although from a low base."
He says this trade is now breaking even, and generating a small profit to export carriers.
ANL's parent, CMACGM, acquired US Lines, based in Santa Ana, California, in December 2008. Now owned by ANL, ANL–USL operates seven vessels between the US West Coast and Australia/NZ, offering around 1300 teu a week capacity. It runs a weekly fixed service, covering Australia’s main ports and Tauranga in New Zealand. Lines says ANL had been plying the US West Coast-Australia/NZ route for some 18 months before the acquisition, last December.
ANL will lift 850,000 containers this year, rising to one million next year. Although a specialist on the Australia-Asia trades, ANL services Asia and Europe, the US and the Indian sub-continent, with some services using Port Klang in Malaysia as a transshipment centre for services to/from Australia. On its major routes, ANL has more than 10 per cent of the container trade, but CMACGM, ANL’s parent, is the third-largest container line in the world, operating a fleet of 377 vessels, including 101 company-owned, serving some 400 ports.
ANL operates autonomously, with Lines reporting to the Marseille head office. Being part of a large global group has given ANL economy of scale when it comes to containers, ship charters and bunker costs.
If forward orders are any gauge, the Australian economy is not about to slow down. Lines says all his ships are full in the lead-up to Christmas. Christmas cargoes start to flow through from August, peaking in November.
Globally, he sees no slowdown in China's exports to Europe, although the rapid growth has slowed. China-US trade has not grown — but it has not declined either.
Intra-Asian trade is the fastest-growing trade, with container growth in double-digit numbers. But it is a trade populated by small regional carriers which offer virtually a taxi service — a high volume, low margin business.
Lines expects to see some consolidation in the global shipping industry, believing that some small carriers will find it difficult to continue. "It is a very tough time for our industry. Everyone is competing for cargo in a higher competitive market. Without doubt, consolidation will continue. And, as usual, our group will look at whatever opportunities there are," he says. |
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