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2012: A Long, Slow Climb? Final numbers are not officially in yet, but it analysts expect that 2011 cargo growth will be flat for the year, rising anywhere from 2-5% in 2012, and continuing to improve at a faster rate in 2013 The eastbound transpacific cargo market is largely driven by retail merchandise and, by implication, U.S. consumer sentiment. Here signals remain mixed and uncertainty high. The official unemployment rate has gradually declined, to 8.5%. Manufacturing has rebounded, with increased durable goods purchases, rising manufacturing employment and steady improvement in wages. Construction, however, is only now beginning to reverse months of losses, and health care - a consistent gainer - is moderating as costs remain high and spending by government, insurers and patients are curtailed. Job gains are not distributed evenly throughout the economy: Certain areas of the country and industry sectors reliant on government spending or subject to offshoring remain hard-hit. Home sales and prices have shown slight gains, but much of that activity appears to be investor-driven. Nearly 1 in 4 mortgages are now worth more than the value of the house and either behind in payments or in foreclosure. U.S. stock indices retrenched in the second half of 2011, driven by slow demand and political unctertainty in housing, jobs and health care, as well as by events in Europe. All of these factors together have cut into household net worth and retirement incomes. Strong 2011 holiday sales were up more than 4% year on year, but income growth did not keep pace, credit card debt is up sharply and the U.S. savings rate going into 2012 was a modest 3.5%. At the same time, oil prices topped $100 a barrel in late 2011, and food prices have increased. These trends in combination have raised questions about the sustainability of consumer spending trends. Consumer surveys suggest that, amid overall higher sales, holiday discounting cut into retail earnings. Sales were bifurcated, with growth at the high and low ends of the market; affluent shoppers went downmarket, department store shoppers moved to big box and dollar stores; and all shoppers focused to a greater degree on bargains and internet deals. Absent any clear catalyst, retail shippers have been reluctant to order and stock merchandise, and when they do it has been at the last minute. The first three quarters of 2011 saw only a 1% gain in Asia-U.S. container traffic, compared with the same period in 2010. Despite relatively healthy back-to-school shopping over the summer, the holiday peak season did not fully materialize, and the surge in holiday cargo that did occur was primarily in November-December, when retailers remained unclear about demand but had no choice but to restock to meet contingencies. Capacity vs. Cargo Demand Ship capacity growth is likely to surpass cargo demand growth throughout 2012-13. Construction costs as much as 40% below pre-recession levels have encouraged a rash of orders in 2010-11, most for ships above 10,000-TEU capacity. Those vessels have mainly been deployed in the Asia-Europe and intra-Asia markets, but many of the ships cascaded into other trades as a result - typically in the 8,000-TEU range - have found their way into the Pacific. An average ship in the transpacific trade at present is about 6,500-TEU in size; by the end of 2012, that will be the minimum size, and by the end of 2013, Alphaliner estimates the minimum vessel size at 8,000 -TEU. Below that size, vessels do not have the scale and the lower per slot costs to profitably move freight at current rate levels. But carriers increasingly find themselves squeezed: Most U.S. ports still do not have the draft, backlands acreage or terminal productivity to efficiently accommodate 8,000-TEU ships fully loaded. And the Panama Canal will not be able to handle ships larger than 4,600-TEU before 2014. Slow Steaming At the beginning of 2012, marine bunker fuel prices topped $700 per ton, approaching the record levels seen in mid-2008. Larger ships, with more efficient slow-speed diesel engines and advanced hull paints and coatings to reduce drag in the water, are key to reducing both fuel consumption and vessel emissions. This will be increasingly important over the long term as carriers struggle to comply with stricter governmental environmental standards as well as shippers' green supply chain initiatives. One simple, effective strategy for cutting emisions is through "slow steaming" ships - typically adding one vessel to a five-ship West Coast rotation or up to two ships to an eight-ship all-water Panama Canal service, to maintain schedule integrity, and sailing those ships at slower speeds. Slow steaming has already generated significant environmental benefits. And, while the practice has lengthened transit times on routes where it is deployed, it has also added capacity and loading opportunities at Asian origin ports. Equipment Issues Another critical ongoing cost issue for carriers is equipment repositioning. Lines entered 2011 with a more than 2:1 ratio of loaded containers moving to the U.S. versus back to Asia. Rising rail and truck rates, along with reduced truck service due to driver shortages and owner-operators leaving the business, have forced up the cost of getting containers from inland delivery points to outbound load points or central equipment depots. The need to reposition empty containers back to Asia has posed challenges for carriers on return sailings where a weak dollar and strong Asian demand for raw commodities, chemicals, machinery and other goods has heightened competition for space aboard ship between empty and loaded containers. Carriers have come under growing pressure from U.S. retail importers to load 48-foot and 53-foot containers aboard ship in order to avoid the cost of transloading cargo to historically domestic equipment at destination. While some carriers have conducted trials, introduction of the larger container sizes has been disruptive to loading patterns and has further constrained effective vessel capacity. Lastly, a number of carriers have moved forward with plans to exit the business of providing truck chassis free of charge at the U.S. port, for harbor area or inland delivery. Maintenance and operation of chassis fleets is gradually shifting to trucking firms, lessors and independently-operated neutral pools, although some carriers may retain smaller fleets and provide chassis for a market-based charge. Rates Asia-U.S. freight rates are currently at or below January 2010 recessionary levels, as new capacity coming into the market and competitive winter season spot rates on key route segments have taken overall rate levels down. In 2011 depressed spot rates carried over into 12-month contracts, resulting in estimated $800 million in aggregate transpacific losses for the year, according to Alphaliner, and up to $12 billion for the industry worldwide, according to SeaIntel. |
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