Cut capacity to increase freight rates despite reduced demand

The rapid reduction of capacity for east-west transport routes to prevent the collapse of freight rates is a very successful strategy for carriers to cope with the Corona virus 2019 (COVID-19) pandemic led to the blockade of major markets in Europe and North America.

By blanking a lot of sailings, carriers were able to maintain freight rates at 25-40% higher than last year, according to Sea-Intelligence Consulting, despite rapidly weakening demand because countries close most of the retail stores and most of the production.

Freight rates from China to Northern Europe last week were 14% higher than the same week last year at 831 USD / TEU and freight rates from China to the Mediterranean were 25% higher at 875 USD / TEU, data from the Shanghai Container Freight Index (SCFI) shows.

SCFI showed that freight rates from China to the US West Coast on May 15 were $ 1,686 / FEU, 25% higher than the same period last year and the only exception was the transport route from China to US East Coast freight rates fell 2.1% to US $ 2,542 / FEU, the lowest price for the whole year, according to JOC's Shipping & Logistics Pricing Hub.

Canceled sailings have reached or just surpassed their peaks, depending on the shipping routes, with the Sea-Intelligence report claiming that this week capacity has been cut on Asia-North Europe shipping by 25%, on the Asia-Mediterranean shipping route currently 30% of capacity, 15-20% of capacity on Asia-North America transport routes and especially up to 50% of capacity has been cut from the route Asia-South America transfers this week (week 21).

"As global demand continues to be significantly affected, we expect volumes in Q2 to decrease across all businesses, and it is our aim to pair the drop in demand one-to-one with reduced capacity in our network" he said. "Rates have stayed above levels seen a year ago and the industry has been very agile in managing capacity."

Container carriers kept cutting back in the third quarter

No canceled sailings were announced for the third quarter, Sea-Intelligence said, or rather there was no indication that carriers made any decisions to cut capacity for the third quarter. Analysts said, "They all clearly expect demand to be depressed through to the end of Q2, and then the level of blank sailings drops to near-zero." While of course nothing can be ruled out, it appears exceedingly unlikely that demand will revert back to normal from July 1. We would therefore expect the level of blank sailings will once more start to increase, as carriers become forced to take a stance on their capacity management for Q3".

Hapag-Lloyd's managing director, Rolf Habben Jansen, said during a conference call about the first quarter on May 15 with analysts, he said that Q2 would see the weakest volume, followed by a slow recovery in the second half of the year. But he said that if volume fell 10% for the year according to analysts' forecast, the company would incur additional costs, which meant a further cut in shipping capacity.

"In reality, net capacity across 2020 will be negative in the end," he said. "We have a fair amount of charter ships in our fleet and we do intend to return a double-digit number of ships that will lower our capacity. We try to adjust our cost base to the demand we see, but we will be able to scale up rapidly when the recovery occurs".

Philip Damas, head of supply chain advisers at Drewry Shipping Consulting, said their data showed a reduction in the number of sailings canceled in the first two weeks of June, only 13-14% of sailings were canceled compared to 18% of sailings canceled in April and May. But he also added that the idle fleet capacity has increased by 250% since May 2019 as carriers cut capacity. "That has created a huge volume of unused transportation capacity. And it also works to reduce the pressure on charter rates, and when demand returns, it will take a long time to be able to use up this idle transport capacity”, he said at the recent Drewry online conference.

Simon Heaney, senior manager of container research at Drewry Shipping Consulting, said in an online conference that the container shipping industry will be in a difficult period through the end of 2020. "The growth rate of 2019 is very interesting. "But it will give way to a double-digit decline in the second and third quarters", he said. "The strength of the recovery will depend on the economic rescue measures that governments offer and the extent to which businesses and consumers can be supported."

Phaata (Source JOC)

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