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Crisis And Opportunity: Carrier Prospects After The Asian Turmoil

T! Ihe fallout from the Asian currency crisis has cast a giant shadow over an already depressed container market, and threatens the 20+ year record of uninterrupted global growth, which has always given consolation to carriers for poor profitability and declining freight rates. However, there may be some considerable longer term benefits from the market dislocation currently taking place.

The general collapse of Asian imports (down at least 10 percent) in the wake of the massive currency devaluations in Korea (50 percent), Indonesia (80 percent), Thailand (55 percent) and elsewhere has worsened already costly container imbalance problems in both the transpacific and Europe-Far East trades, but Asian exports have risen equally dramatically (estimated at around 12 percent), prompting both equipment and space shortages on outbound trades.

Given that eastbound t/pac and westbound EFE rates are substantially higher than rates on the trades' weaker legs, carriers have received an infusion of higher paying traffic and a loss of by Mark Page, director Drewry Shipping Consultants Ltd. marginally priced cargo — albeit at the cost of much greater container repositioning expenses. Asian exporters have found themselves in the unaccustomed position of being on the wrong side of the supply/demand equation, giving carriers a strong hand in contract negotiations.

Moreover, carrier cohesion has, forcibly, been strengthened by the severe financial impact of the crisis on Asian lines who are no longer in a position to be so aggressive on price.

What should be the response of carriers to this shift in the balance of power? Perhaps most importantly, they need to finally accept that the past approach of operating a liner service with a one way (i.e. downward) pricing policy to fill marginal vacant space has been ruinous, and use the opportunity which the Asian export boom has created to change the direction of freight rates — if not permanently then certainly in the short term.

Historically, liner shipping offered stable rates for a known level of service, but somewhere in the containerization process this relationship got separated. The level of service remained — in fact it got much better — but rate stability disappeared, and in the process so The containership market has been swept by company and service consolidations. did the linkage between rates and volume.

When volume/utilization fell so did rates, but when volume/utilization rose, rates did not. Carriers must re-establish the mechanism whereby pressure on space triggers an upward move in freight rates — while shippers must appreciate that in a fluid market rates can go up as well as down — and that securing a fixed, contract rate may entail paying above the open market rate for the slack-season periods of that contract. The reefer shipping industry knows this basic fact above all others.

When demand is high and ships are full, rates must go up to compensate for both the costs of operating that capacity in slack periods and the rate dilution which inevitably occurs at that period. A much greater degree of seasonal pricing is clearly indicated in trades with major fluctuations in cargo volumes, and already the transpacific carriers have announced the introduction of a "temporary peak season surcharge." Other trades will need to follow suit.

Such a strategy will be reinforced by the current space shortages, which emphasize the message of opportunism and flexibility in rate making. Contracts made to secure cargo at low rates do not look so smart when demand rises - and when what was already effectively a discount for stable, guaranteed service becomes even further below the prevailing market rate. And carriers do seem to be reacting positively to the opportunities presented by the surge in Asian exports. Far East-Europe rates rose by $200 per FEU in January (and stuck) and are scheduled to go up by a further $300/FEU in July. If the Asian export boom continues, carriers might well contemplate a third price increase within the year.

Transpacific eastbound rates rose by $300/FEU in May and unlike many other such increases these appear to have been widely accepted.

With container freight rates in clear long term decline, such opportunities to secure much needed windfall gains need to be exploited to the maximum that the market will allow - because the supply/demand balance is not going to stay in carriers' favor permanently. Despite the major problems which emerged in the Far East during 1997, both regional and global container traffic growth remained surprisingly firm, with The middle of a ship-to-ship transfer operation is not the time to find out your fender isn't up to the job. Protect yourself with Seaward's new Oflshore SEA CUSHION fender the toughest fender available, made specially to perform in today's most demanding offshore applications.

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