Freight rates on imports fall as volumes drop

The dramatic decline of the U.S. dollar against the currencies of its major trading partners in Europe over the last year continues to drive the reversal of fortune on the trans-Atlantic trade lanes, as U.S. products become more competitive in Europe, while European products grow more expensive in the U.S.

Eastbound ships are stacked to capacity with containers filled with U.S. goods bound for Europe, while westbound ships are only running a little more than 80 percent full. But the dollar’s decline appears to be leveling off, as major European economies stutter and the euro and the pound begin to lose steam. That could stem the decline in U.S. imports in the next year and slow U.S. export growth, but forecasters’ crystal balls are still a bit murky on this point.

The space shortage has eased a bit this month because much of Europe is on vacation. “So there’s not a lot of cargo moving in mid-August,” said Ron Bailey, manger of Brewster Lines, a St. Louis-based non-vessel-operating common carrier. In addition, the dollar has been getting stronger — on Aug. 13, the exchange rate was $1.49 to the euro, compared to $1.59 at its weakest point.

“That’s starting to take a hit. So as a result, there’s more space available, more equipment, less demand,” Bailey said. That translates into shorter waiting times, but shippers may have to wait several weeks for a booking, depending on the origin and destination ports.

Beset by declining volumes and freight rates on the westbound leg of the trade in the first few months of the year, carriers have largely completed the reductions in vessel capacity they thought necessary to stabilize rates. They expect no further cuts. But even in the face of tight capacity on the eastbound, or backhaul leg, and expectations of some improvement in westbound volumes by the fourth quarter, carriers don’t plan to add capacity. Carriers plan further rate increases in the eastbound trade where demand is strong and supply is limited.

 “It looks like a fundamental change,” said Soren Castbak, senior director of trans-Atlantic services for Maersk Line. He said the eastbound trade has shown strong volume growth of 15.2 percent while the westbound volumes dropped 4.2 percent. “In view of the macroeconomic developments in the U.S., including the credit crunch and the depreciation of the U.S. dollar, this trend will continue but with slower eastbound growth in 2009,” he said.

While the outlook for rates and volumes over the next six months is fairly stable, the trade nevertheless faces major changes when the European conference system, which has allowed carriers to set rates and surcharges collectively, comes to an end on Oct. 18. That’s when carriers’ exemption from the European Union’s antitrust laws formally ends and conferences are out of business. Even before that deadline, the Trans-Atlantic Conference Agreement closed at the end of June, lest any decisions it might have made in the intervening months affect carrier-shipper relations after Oct. 18, and thus trigger scrutiny by the EU’s antitrust commission as anti-competitive.

TACA’s disappearance will have no effect on freight rates because nearly all rates are already being hammered out in individual negotiations between shippers and carriers. But it will affect surcharges such as the bunker adjustment factor and terminal-handling charges. Carriers had grown accustomed to relying on the conference surcharges set by TACA, but are now developing their own surcharges.

Shippers are not especially concerned about the new surcharges. “There’s a certain amount of gnashing of teeth about the elimination of conferences,” said Geoffrey Giovanetti, managing director of the Wine and Spirits Shippers Association, which negotiates freight contracts for its members. “All the lines have recognized that TACA is out and have introduced their own surcharges. I don’t see any dire consequences.”

Maersk introduced its own formula for calculating bunker adjustment fees in the trans-Atlantic in July, which Castbak said is sticking. APL Ltd. is preparing to roll out its formula for bunker surcharges and terminal-handling charges later this month.

“We plan to move all of our eastbound business to a floating fuel surcharge as of Oct. 1,” said Kenneth G. O’Brien, APL’s Atlantic trade director. “The formula on both the eastbound and the westbound legs has been set, based on our thinking about transparency. We think shippers will understand the logic behind it.”

APL also plans to update its European terminal-handling charges on Oct. 1, and will roll all of the smaller ancillary charges such as security surcharges into its basic freight rate.

“We’re going to roll them in to streamline our tariffs and our billing processes,” O’Brien said.

The end of conferences is not likely to affect freight rates one way or another. “It won’t make any difference for us because we started dealing with individual carriers years ago, even when conferences were strong,” Giovanetti said. “The conferences were a useful foil in that they would come out with a tariff for a $300 increase in rates per box, and the carrier could come to us and say: ‘The increase could have been $300, but I’m being a nice guy, and for you, it’s only $150.’ ”

Westbound rates started plummeting in February as it became clear that import volumes would continue to decline in the trans-Atlantic after the winter lull. “We were astonished that the import rates that looked like they were strengthening a year ago just began a nose dive in February,” Giovanetti said. “They seem to have stabilized now. Maybe they have hit bottom, but there are no more aggressive give-away programs.”

Carriers reacted quickly to the rate decline by cutting capacity. Evergreen Marine and Zim Integrated Shipping Services ended their joint NEC service in May. Maersk sold 900 slots on its TA3 service from North Europe to the East Coast to CMA CGM in June, enabling the French carrier to eliminate the “Liberty Bridge” service it operated in cooperation with China Shipping. This took four 2,500-TEU ships out of the Atlantic, cutting capacity in the trade by 5 percent.

Evergreen plans to drop calls at Los Angeles next month on its NUE pendulum service, which will reduce overall capacity because it cuts capacity on the Europe-to-West Coast and the West Coast-to-Europe markets, and will put some pressure on space to and from the West Coast.

It’s difficult to quantify how much capacity has been cut from the trans-Atlantic because other services have had capacity upgrades. When Evergreen and Zim canceled their loop, they bought slots on the Grand Alliance, which increased the size of its ships.

“My best guess is that capacity has been cut by 7 to 8 percent,” O’Brien said. “Westbound rates are, for the most part, stable. The sharpest decline was probably in the first quarter. We’re pretty much plodding along at the same rates today because demand is stable.”

He said there’s not much room for the westbound rates to fall further. “We’ve reached the most common denominator, and I don’t see anyone in a rush to cut them further,” O’Brien said.

“The North Atlantic still faces issues with overtonnage when measured on the westbound leg despite the recent withdrawal of two strings in the market,” Castbak said. “With high bunker and operational costs, combined with stagnating westbound trade, it is more likely to see further rightsizing of capacity than additional capacity.”

At the same time, there is not nearly enough capacity to handle the soaring European demand for U.S. products on the eastbound leg of the trade. That’s driven up freight rates.

“With volumes up and capacity tight, we think rates are going to be rising,” O’Brien said. Like most other carriers, APL has pushed through a series of rate increases since the beginning of the year, most recently in July, and the increases have been sticking.

“While the eastbound flows are overtaking the westbound volumes,

the revenue of U.S. exports remains insufficient, even after recent improvements,” Castbak said. “It is therefore more than likely that lines individually will try to continue the revenue improvement initiatives on the eastbound leg.”

He said Maersk plans to institute further rate increases on this leg of the trade.

But even with eastbound and

westbound volumes in approximate balance, carriers don’t plan to add capacity. “We’re turning away cargo and losing market share on the eastbound leg, but we are not in a position to increase capacity based on the underlying economics,” O’Brien said.

He doesn’t think the eastbound leg will become the head-haul leg even though the volumes and rates are picking up. “The true definition of a head-haul is the leg that pays the underlying cost of the trade, and we’re not there yet,” he said. “We still need a significant increase in eastbound rates or a significant decrease in westbound rates to get there.”