Carriers using GRIs to put brakes on falling rates
Shipping lines are hoping to repeat the rate hikes last March that injected some urgently needed profitability into the business.
Drewry’s Neil Dekker made an interesting point recently. The maritime analyst said that with too much capacity and too low cargo volume, GRIs were limiting further freight rate erosion rather than advancing the rates by any sustainable margin.
Drewry expects global demand to increase by 4.6 percent this year, but that depends on the lines taking a sensible approach to the market, not something that comes naturally to them. What the carriers need to do is pull out capacity on the over-supplied trade lanes, but they have so far proved reluctant to do so. They cannot continue to chase market share while refusing to lay up ships, especially with 40 vessels greater than 10,000 TEU hitting the market this year.
So much capacity floating into service will have a huge impact on the supply-demand balance, the management of which is crucial to the freight rate level. The rate volatility experienced by the industry over the past two years makes it difficult to manage a trade, and not only for the shipping lines. Forwarders complain bitterly at the bargain basement rates that shorten their already narrow margins.
Laying up vessels seems to have become a last-minute, last resort move rather than a carefully planned strategy that could have immediate benefits. Last March the carriers forgot about utilization and managed their capacity better and the results were immediate and highly positive. Further GRIs were unsuccessful as many carriers fell back into utilization-boosting, market share increasing mode.
Aggressive cost cutting has left these same lines with very little fat, so a greater portion of any extra dollar realized in freight rates will go towards the bottom line. If ship supply was better controlled, the profits could come rolling in just like they did in March last year.
No doubt with that scenario in mind, Hapag-Lloyd has again led the charge on Asia-North Europe this year, imposing from mid-March the same US$750 per TEU GRI that it hit the market with last year at the same time. All the other carriers on the trade are expected to soon follow with their own March increases.
For the carriers’ sake, we hope that the increases stick at 80 percent or above like they did last March, but sadly, the economic situation is different. Europe is even worse off than last year and the US economy is flat, and there are all those large ships coming online, so it is hard to see the prices being accepted by the market.
In fact, the weakness in the Asia-Europe trade is so great that rates are more likely to fall further after Chinese New Year. So maybe Drewry’s Dekker is right and the high GRIs are indeed being used as a tool to put the brakes on falling rates.
If the container carriers can even hold rates at their present levels it will probably be regarded as a successful exercise.