Low rates could lead to more ocean capacity cutbacks

For the ocean shipping industry, 2010 was a very good year. After a rough 2008 and 2009, rates and volumes rose in tandem and shipping lines saw their bank accounts swell.

A year later, however, carriers find themselves heading back toward the bottom of the rate barrel, and 2010 is fast becoming a fond memory.

"Most rates, especially on the trans-Pacific eastbound lanes, are below break-even," said Greg Tuthill, senior vice president of trade management and North America sales for NYK Line. "In some cases, Asia-to-Europe rates are not even [as high as the] bunker fuel surcharges." Tuthill spoke during a presentation at the Coalition of New England Companies for Trade (CONECT) 10th Annual Northeast Cargo Symposium in Foxborough, Mass., earlier this month.

Tuthill noted that some trans-Pacific spot rates are down sharply from 2010 levels on the same routes. Spot rates from Hong Kong to the U.S. West Coast, for instance, have declined by about 45 percent over the past year, and long-term rates generally are well below their short-term counterparts, Tuthill said. Even so, carriers may be tempted to keep rates low to attract a "quick injection of volume for short-term gain and to boost cash flow," he said.

Some carriers have already reduced or suspended service on some lanes as a cost-cutting measure, Tuthill noted. If rates don't come up and stay up soon, "we're likely to see more reductions in service, including 'cold layups' over the winter," he said.

A cold layup involves shutting a ship down completely, as opposed to keeping a skeleton crew on board to maintain systems. It takes longer to bring a ship back into service from a cold layup.

The advent of larger, "post-Panamax" ships may eventually help carriers reduce their costs to compensate for low rates, but that probably won't happen in the short term, Tuthill predicted.

A carrier can only achieve economies of scale for the larger containerships if the charter market remains tight, Tuthill said. That's because when charter space is hard to come by, shippers will stick with scheduled liner service, and it will be easier to fill big containerships. But charter rates are likely to remain low for some time, he predicted.

NYK is taking a conservative approach, Tuthill said. It derives less than one-fourth of its revenue from liner shipping and has no plans to purchase bigger containerships, he said.