Thursday, April 02, 2009
Janet Porter - Wednesday 1 April 2009
GLOBAL shippers are boycotting some container lines because of the risk of failure after a carrier-driven rates war that has pushed some to the brink of bankruptcy.
Nestle’s head of global ocean transport Brett Whitfield said today that the food and beverage group was excluding certain carriers from its tender process and diversifying the number of container lines used overall in order to lessen exposure to service closures by financially weakened operators.
But Neptune Orient Lines president and chief executive Ron Widdows does not expect any of the big lines to collapse despite rock bottom freight rates that show little sign of any recovery.
“I would be shocked to see a significant player fail in the short-term,” he told Lloyd’s List.
Even so, Mr Widdows admitted that container lines were now braced for financial results that will be “much worse” than most were anticipating a few weeks ago after a dreadful start to the year.
As that becomes more evident, “so a level of sobriety is developing,” he observed.
Drewry Shipping Consultants recently forecast that combined losses could total $32bn, a figure that Mr Widdows agreed was conceivable.
There is now greater recognition that the current situation cannot continue, with lines - whether listed, privately-owned or under state control - having to face shareholders and explain why they have thrown “a staggering amount of money into a black hole,” he said.
Speaking at Containerisation International‘s 11th annual global liner shipping conference, Howe Robinson‘s director of research and consultancy Paul Dowell said $84bn had been committed in recent years to containership orders. At the same time, ship values have collapsed by up to 60% from their peak, while average charter rates have plunged by 80%.
A huge amount of activity is now going on behind the scenes to cancel newbuilding contracts, and despite resistance from the shipyards, most experts are sure many contracts will eventually be revoked since banks will not be able to meet their obligations because of falling asset values.
But contracts are under review right along the transport chain, with APM Terminals’ chief commercial officer Richard Mitchell revealing that the ports operator is now pressing for terminal concessions to be renegotiated after a plunge in container traffic.
Illustrating the depth of the slump, Mr Mitchell said that five miles of empty containers were now said to be lined up in Shanghai.
Shippers have benefited from the plunge in freight rates that have fed through to other prices along the supply chain, but Nestle’s Mr Whitfield stressed that his company “ did not ask carriers to drop their rates - they did that themselves.”
Nestle “could not ignore the opportunity thrown at us,” he said.
If lines offer close to zero ocean rates, “we would be crazy not to take them.”
Nevertheless, he expressed concern that a company like Nestle, which uses about 70 different carriers to ship its products to every corner of the globe, could find some trades no longer covered as carriers axe unsustainable services.
He also castigated container lines for continuing with an outdated mentality and failing to change industry practices despite the end of their antitrust immunity and joint pricing in Europe.
“Not one line has come up with some new ideas” following abolition of the conference system, he complained.
Mr Whitfield also said choice was being eroded by the tendency for lines to share ships. While careful to stress that alliance members still competed fiercely in terms of marketing and price, the Nestle executive said certain trades such as the Mediterranean to US east coast route offered very few ship alternatives these days.
Top priority now for container lines is to bring some stability to prices at a time when spot ocean rates in both the transpacific and Asia-Europe trades are still under enormous pressure as carriers chase a shrinking pool of cargo.
Recent pricing “antics” are adding to the challenge of negotiating new annual contracts covering the eastbound Pacific where lines are seeking rates some $500-$600 per feu above very depressed spot rates, said Mr Widdows who is chairman of the Transpacific Stabilization Agreement.
“There’s a way to go to achieve that objective,” he said in an interview. But only around 10% of contracts have been signed so far.
In the Asia-Europe trades, where a number of lines have brought in rate restoration programmes that took effect today, Mr Widdows said carriers should know within a couple of weeks whether they had made any progress.
At the moment, rates are barely covering variable costs, let alone fixed overheads, he said, while some lines continue to offer all-on rates that combine ocean transport with fuel surcharges.
But he discounted suggestions that any carriers were deliberately trying to drive others out of business through a price war.
“That would be a silly undertaking to consciously go down that road,” he told Lloyd’s List.