Europe’s continuing economic recession remains badly timed for ocean carriers who still have an armada of ULCVs planned for delivery before the end of the year. The continuing collapse in westbound freight rates is worrying, but could be reversed by more radical changes on the supply side.

Westbound:
The latest cargo flow figures for March confirms that westbound volumes from Asia to Northern Europe are still falling after taking into account seasonal factors. The 714,000 teu loaded out of Asia was 7.8% lower compared to the same month last year. Although this took 1Q13’s monthly average up to 729,000 teu, 3.8% more than between October and December, it was still 5% below the monthly averages achieved in each the previous two quarters.

Moreover, by early May the market should be receiving more promising signals about the peak season to come in the third quarter, but nothing has yet appeared on the radar screen. The problem is that most of Europe remains in (or very close to) recession, and there is little light at the end of the tunnel. Even the UK, Europe’s largest import market, finished 1Q13 with GDP growth of just 0.3%, without which it would also have been classified as being in a triple-dip recession.

According to the IMF’s latest predictions three weeks ago, the Eurozone’s economy will now shrink by 0.3% this year, compared to the 0.1% decline previously forecast.

To help give a flavour to the nature of the problem, the value of machinery exported from China to Europe in 1Q13, the largest sector according to Chinese Customs, was 5% higher than a year earlier, but this ignores the negative effect of China’s high inflation. On the other hand, its next highest export, electrical machinery (including sound and TV equipment), was 8% down, but the third, knitted clothing, was 19% higher. After that, bedding and furniture was up 24%, non-knitted clothing was 12% higher and footwear was 34% up.

The implication is that much of the downturn in cargo is due to a reduction in discretionary spend. Whilst this may, perhaps, be stating the obvious, it suggests that when the positive turnaround comes, it will be quick.

Whatever the reason for the downturn, it remains a worry to ocean carriers who, at the end of April, still had another 31 ships over 10,000 teu due for delivery this year, including Maersk’s first 18,000 teu goliaths, and their delivery schedule was originally organised around peak season growth, not a recession. News of CSCL’s order for 5 x 18,400 teu units will also do little for market sentiment right now.

Carriers continue to try to postpone deliveries, therefore – the latest being three of Hapag-Lloyd’s 13,250 teu ships, from 2H13 to 1Q14 – or hide unwanted tonnage elsewhere, but trade from Asia to North America, the most likely option, is currently little better. Despite the poor health of the trade, only one service withdrawal between Asia and Northern Europe has so far been announced – Evergreen/CSCL/Zim’s CES 2/AEX 2 loop deploying nine fast vessels averaging 9,419 teu, which will be taken out in June.

Evergreen is currently in the process of upgrading its fleet of nine 7,024 teu vessels deployed in the CES loop to 8,452 teu, however, so what it gives with one hand it will be partly be taking back with the other. Three of the bigger vessels were already in place at the beginning of April. By the time these changes are completed, the total effective westbound vessel capacity offered by all carriers in April will be 4% less.

Otherwise, April’s total effective westbound vessel capacity of 843,161 teu was virtually the same as in March. Another six sailings were cancelled, the same as in March, but much less than the 11 in January and 10 in February.

The consequence is that average westbound vessel utilisation climbed from 74% in February, when many factories closed due to the Chinese New Year, to 85% in March, due only to the return of normality.

Eastbound
Eastbound cargo shipped out of northern Europe to Asia in March remained static compared to February (395,000 teu). This brought the average monthly volume in 1Q13 up to 381,000 teu, 4% more than in the previous quarter.

Whilst much continues to be made of China’s growing import potential stemming from income redistribution and increased national wealth, the value of its containerisable imports from Europe in 1Q13 was still 7% less than in the same period last year, which suggests that if Europe is to export itself out of recession, it will have to be in bulk commodities. Taiwan’s containerisable traffic to China alone was almost as big as Europe’s exports.

Such is the miscellaneous nature of Europe’s exports to China that the fifth largest commodity transported last year is classified by Customs only as ‘goods not otherwise enumerated’. Moreover its value fell by 17% compared to 2011.

On the other side of the equation, vessel capacity in March (614,984 teu) was 2.6% higher than in February, so average vessel utilisation fell from a poor 65% to an even poorer 64%. For more details on service changes, see Westbound section above. By the time Evergreen has finished making all its changes in June, the total effective eastbound vessel capacity offered by all carriers in April will be reduced by 4.8%.

Source: Drewry Maritime Research