Issue link: https://jocdigital.uberflip.com/i/419133
INTERNATIONAL MARITIME IMPORTING | EXPORTING | PORTS | CARRIERS | BREAKBULK | GLOBAL LOGISTICS 26 THE JOURNAL OF COMMERCE www.joc.com NOVEMBER 24.2014 By Peter T. Leach FO R YE AR S , OCE AN carriers have com- plained that freight rates in the trans-Pacific trade are unsustainable, the victim of slow growth in trade and rapid growth in capac- ity. Now Maersk Line, the world's largest and most profitable of those carriers, is about to do something about it. "Maersk Line is delivering satisfactory results, but this is not the case for the east- west trades," Klaus Rud Sejling, head of east-west trades, told The Journal of Com- merce. "This has been the story for a number of years, especially when you look at the Pacific West Coast. This market is particu- larly troubled, largely due to overcapacity." To increase its return on the notoriously high-cost and unprofitable trade lane, the Danish carrier is considering three mea- sures, Sejling said: l It may negotiate fewer long-term con- tracts with its trans-Pacific customers unless it can increase contract rates. l It will manage vessel capacity more tightly. l Unless it can get higher prices, it will review its inland business, possibly cutting back U.S. inland services like it did several years ago. Sejling declined to say whether Maersk Line is making money in the trans-Pacific, but did say overcapacity has led to "loss- giving" rates on long-term contracts and "very challenging" profit on inland business. Although spot rates in the trans-Pacific have held up better this year than in the Asia-Europe trade, much of the business Maersk conducts in the trans-Pacific is car- ried out under long-term contracts at fixed rates, which Sejling termed "completely unacceptable." And that's why the carrier is reviewing its contractual rates. "We will do fewer long-term contracts unless the prices come up," he said. The root cause of the low contract rates is shipper expectations that too much vessel capacity leads carriers to cut rates to preserve their market share. "We will look at options to manage capacity," Sejling said, without specifying how the carrier would manage capacity more tightly. "In the toolbox, one of tools we are constantly reviewing is whether we can manage capacity even tighter." It wouldn't be the first time Maersk Line has cut back on its inland U.S. intermodal and truck services. In 2007, before the 2008- 09 recession caused world trade to shrink, the carrier eliminated many inland delivery services and closed depots where equipment was stored but seldom used. Now it's considering further steps to boost the profitability of the round-trip trans- port of container equipment on inland routes subject to significant variable costs. "On inland, we are reviewing selectively whether we need to get prices up or reduce our activ- ity," Sejling said, adding that Maersk Line is doing well in some of its inland corridors, but that on others, the compensation it gets doesn't match the cost. "That's why we have to selectively review our appetite for part of the inland business portfolio." Maersk Line's plans to review its trans- Pacific services came on the heels of reporting a 24 percent year-over-year increase in third- quarter profit, which reached $685 million. It attributed the increase to lower costs, higher average freight rates and a 3.7 percent increase in container volumes. Sejling said the steps Maersk Line is con- sidering are in line with its overall strategy, which, he said, is working. "We will grow with the market, run a tight network and manage our capacity and focus on reducing costs in general," he said. Two factors boosting Maersk Line's third-quarter profit were the 3.2 percent year-over-year decline in bunker fuel prices, and lower fuel consumption, which dropped 2.4 percent, largely because of slow-steaming. Despite the price drop, Maersk Line has no plans to speed up its ships. "No, no. In addi- tion to bunker prices, a critical factor is the environmental aspects, which are not going to change because the price of bunker has tem- porarily reduced," Sejling said. Maersk Line has committed to reducing carbon emissions by 60 percent by 2020 from its 2007 baseline." The industry also faces what he called a substantial cost increase when low-sulfur International Maritime Organization regula- tions are introduced in emission control areas of North America and North Europe on Jan. 1, lowering the sulfur content of fuel to 0.1 per- cent from the 1.0 percent ceiling now. Maersk Line expects inbound volume growth this year in the trans-Pacific and the trans-Atlantic to increase about 5 per- cent, but no growth on the outbound legs of the two trades. It's projecting 3 to 5 per- cent global volume growth in 2015, "but we expect the North America trade to be on the lower end of that forecast," Sejling said. "We see that the economic outlook is favorable for North America, but we see that this year is showing higher growth than we expected inbound, and we expect that to normalize next year," he said. Maersk is forecasting inbound volume growth in the Asia-Europe trade at the lower end of its global forecast, or about 3 percent, but it expects the growth in out- bound shipments from Europe to Asia to pick up, in the 5 percent end of the range. Maersk Line and Mediterranean Ship- ping Co. will launch their new joint 2M Alliance in January. The alliance will provide six joint weekly services in both directions in the trans-Pacific and the trans-Atlantic. Sejling said the alliance would accomplish two goals for Maersk Line: "to provide bet- ter service for our customers at lower cost." In the last two years, Maersk Line has rerouted all of its all-water services from MAERSK PUTS PACIFIC ON NOTICE The world's largest carrier reviews trans-Pacific services in a bid to make 'unsustainable' rates sustainable