December GRIs must stick or lines will be off to a bleak start

Nov 22, 2012, 8:45PM EST
Backed into an unprofitable corner, expect container lines to fight hard for the end-of-year freight rate hikes.

The general rates increases carriers hope to implement from December 15 are flooding in. Container lines on transpacific and Asia-Europe/Mediterranean trades have announced plans to hike rates and will be vigorously pursuing the proposed figures, generally around US$550-650 per TEU.

Weak market sentiment forced the carriers to postpone previous GRIs but shippers should expect them to stubbornly stick to the advertised increases this time. Financially, the shipping lines have little room left to manoeuvre.

Profitability this year has been unachievable as overcapacity and poor demand saw rates lingering at below break-even and a stubbornly high oil price pushed operating costs to record levels.

With the container shipping industry preparing to record another year of losses and trying to find certainty in a very uncertain 2013, wringing every last dollar out of every box has become its prime objective. Forget service levels and loyalty, improving profitability is priority number one.

The carrier drive to balance ship capacity and demand has seen a record amount of capacity being scrapped, surplus ships are being idled and deliveries are being deferred. Will it help? Not by much, unless business improves and forget everything you read about China's economy – improving liner balance sheets all depends on Europe and US consumers.

Another reason container lines are trying to bump up rates is to occupy a better position when annual contract rates on the transpacific are negotiated early next year. The carriers and their big customers will sit down and try to thrash out a mutually unacceptable compromise, the same procedure as every year.

Container lines are desperate to push up freight rates to discourage shippers from going to the spot market. They want to lock their customers into annual contracts signed at profit-generating levels.

What’s good for the goose in this case, however, is not good for the gander. Shippers are happy to play in the spot market as long as rate levels remain low. With such volatility in rates - and such low levels being regularly reached - liner customers may be better off avoiding 12-month contracts.

The third reason lines want rates to rise has to do with Chinese New Year. The Year of the Snake begins in mid-February in 2013, which is later than usual and leaves more time for factories to produce exports, so the carriers want to have higher rates in place to capture any post-Christmas demand.

If there is any post-Christmas demand.

 
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