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A Strong First Half for 2010, But Then... Asia-US container trade emerged from the Asian Lunar New Year holidays surprisigly strong, with healthy U.S. retail sales and business inventory replenishment suggesting the beginnings of recovery. By the end of June, liftings had reached 2.75 million 40-foot containers (FEU), a 17% increase over the same period a year earlier. The growth trend continued through August, but has since begun to moderate. Tight vessel capacity and a shortage of container equipment were prominent during the first half of 2010. At one point global recession had parked upward of 540 container vessels worldwide in layup and sparked unprecedented service consolidation, not least in the transpacific market. Just as important, dry container production in Asia - mainly in China - dried up during 2009, forcing factory closures by the world's major equipment suppliers. Pulling those ships back into service, reopening factories and recruiting and training new workers has taken time. Still, real progress has been made in restoring capacity to the transpacific trade. According to shipping industry analysts AXS Alphaliner, the number of idle containerships worldwide has fallen to 232 in Q3 2010, either as new services have been launched, previous services have been restored, or additional ships have been introduced into existing services as part of slow-steaming strategies to conserve fuel. In the transpacific market specifically, 14 services had been launched or restored by Q3, with another 2 scheduled to begin in September-October. Alphaliner reports a 17% increase in transpacific capacity during 2010, with 9% growth in Q3 alone. TSA member lines have varied widely in their individual economic and competitive decisions to adjust capacity, but member lines' combined average weekly capacity at the end of August 2010 was 6% above levels at the same time a year earlier. A number of carriers have also introduced 'extra loaders' into service, ships added to an existing vessel rotation purely to meet surging demand eastbound and return empty containers from US port areas to Asia quickly. Rates have shown steady improvement with negotiation of the new 2010-11 contracts which substantially restore eastbound rates to 2008 levels. Mixed signals in the U.S. economy, however, have caused container lines to hesitate in further restoring capacity and services to the market. Asia-US demand began to show signs of weakening in the late summer of 2010, caused by mixed signals in the economic data. Specifically: - The European debt situation created volatility in financial and commodity markets, leading high-end consumers and business spending to retrench. - Political fights over U.S. health care, financial industry reforms and tax policy, plus regulatory uncertainty extended years out into the future, have stalled businesses hiring and investment. - Government stimulus efforts have not produced lasting results: private sector jobs are growing but not on the scale needed; housing and car sales have fallen off sharply as tax credits and other public incentives have expired. - While mortgage interest rates are at record low levels, job insecurity has made prospective buyers reluctant to buy and lenders reluctant to lend; one in four homes is valued below its mortgage than with an even higher percentage behind in payments. Loan modification efforts to keep people in their homes have not proven successful. The end result, heading into the Q4 holiday season: Consumers are saving and paying off debt rather than spending, and when they spend they continue to look for value and discounts; businesses have spent on IT and office equipment to improve productivity, keeping the employees they have but not hiring new workers. To the extent that orders from the US have slowed, exports of related raw materials and inputs to Asia - cotton for apparel, chemical resins for plastics, wastepaper for packaging - appear to be tapering off as well. that in turn maintains an approximate 2:1 cargo/equipment imbalance that adds to container repositioning costs Transpacific carriers are seeing their basic operating costs continuing to rise in several key areas: Inland rail Inland and local truck Shoreside and inland cargo handling Equipment repositioning Asian feeder services Maintenance and repair Marine bunker fuel prices continue to exhibit volatility, though not to the same degree seen in the past two years. Still, prices in the $440-460 per metric ton range account for more than half of total fixed operating cost per sailing, and place pressure on carriers to scale operations precisely or risk losses that may not be fully recovered for a period of months. Industry forecasts expect 2010 Asia-US cargo growth to moderate from first half levels to about 12% by yearend, slowing in 2011 to single-digit growth based on current trends. Carriers will also see delivery of some new vessels that had been delayed in 2009-10. This will require very careful fleet planning and close monitoring of trade trends in the coming year.
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