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Friday, 3 February 2012

Four large container shipping companies are accused of making illegal price agreements. Is the accusation true or just a simple bluff?!

Today there was a very interesting story in the Dutch daily newspaper NRC ( Interesting, because the story seems to be at odds with the cool data of the Baltic Dry Index (BDIY) for dry bulk shipping and the Harper´s index for container shipping.

The NRC stated that four of the largest container shipping companies on the sea route between South-East Asia and North-West Europe have been making illegal price agreements. Here are the pertinent snips of this story:

The Dutch shipper’s organization EVO is pulling the alarm bell on the significant price increases that the large shipping companies almost simultaneously carried through on the important sea route between South-East Asia and North-West Europe. According to EVO this might be a case of illegal price agreements, specifically forbidden by the EU.

During the last weeks, important shipping companies like AP Moeller - Maersk A/S (MAERSKA), Hapag-Lloyd and the combination CSM and CMA-CGM SA have announced large price-increases up to 100% of the current shipping tariffs, only days after one another. Other shipping companies have also almost doubled their prices. These shipping companies combined handle more than 60% of the container market between Asia and Europe.

EVO, the representative organization of about 20,000 Dutch companies attached to the logistics industry, finds the timing of the price increases suspicious. ‘I can’t prove anything’, policy adviser Marco Wiesehahn states, ‘but it is at least extraordinary that the most important shipping companies simultaneously increase their prices by this much.’

The price increases of the shipping companies counter the current trend in the market, where there has been a hard battle for the lowest price for a number of years. At mid-2010, shipping a 20 foot container from Shanghai to Rotterdam cost more than $1.500. In the meantime this tariff dropped to $800. With the price increases that have been announced lately, the price level is suddenly back to where it was one and a half year ago.

According to Marco Wiesehahn of the EVO, the price increase can’t be explained in the current market. Wiesehahn:

‘During the last years many new vessels have been ordered. Now world trade is decreasing, there is an enormous overcapacity. When shipping companies raise their prices this very moment, there is something not right about it.’

According to the EVO there is no cheaper alternative at hand. ‘Smaller shipping companies might be cheaper in the future, but can’t supply the volumes that our customers need. The large shipping companies now fixed the market at a higher price level.’

A spokesman of Maersk Netherlands denies that price agreements have been made. According to the spokesman it is not remarkable that the shipping companies followed each other´s price increases. ´Shipping companies always look sharply at each others. Compare it to gas stations, if you like. And lately the tariffs were heavily below cost price.

There is something that I don´t understand about this story. When four of the largest shipping companies in the world at the line Shanghai – Rotterdam (probably one of the busiest lines for container shipping in the world) all double their rates, you would expect a sturdy upward movement in the shipping price indexes: the Baltic Dry Index (BDIY) and the Harper´s Index (Harpex). But that didn´t happen.

Both indexes didn´t show the slightest upward movement during the last two weeks. There has been an upward move in January, but that was far away from double rates and in the weeks afterwards the index was moving downwards again (see the first two pictures):
Harper´s Index (Harpex) for last 3 months
Courtesy of : 
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Harper´s Index (Harpex) for last 5 years
Courtesy of : 
Click to enlarge
Baltic Dry Index (BDIY) for 2007-2012
Courtesy of
Click to enlarge
 And I must admit that this is truly puzzling me. But anyway, Maersk admitted in the NRC article that it raised its prices lately and I guess that the other shipping companies did this too. This should make the Harpex rise sharply very soon.

For the reason why the shipping companies have raised their prices so much, I refer to a story that was printed at Bloomberg´s  at January 26. Here are the most important snips:

Container ships can’t go any slower.

Shipping lines are running out of options to stop losses as sailing speeds reach their lower limit, exhausting a solution that helped restore profitability in 2010.

The global container fleet is now cruising near record-low speeds after slowing 11 percent from August when the freight rate market collapsed, according to data compiled by Bloomberg and Lloyd’s Register. Drewry Shipping Consultants Ltd. estimates some of the smallest shipping lines will run out of cash in the second half of this year as the industry fails to adjust to overcapacity that’s allowing customers to push down rates.

“Container lines have already exhausted most of the tricks for absorbing capacity,” said Bjorn Vang Jensen, a Singapore- based vice president at Electrolux AB (ELUXBB) who oversees about 150,000 shipments a year. “Some of these container ships are now so slow that they’re close to the speeds of the old sailing ships. The clippers might actually have been faster.”

With options running out, investors in container-line stocks should brace themselves for losses. Still, shares in Copenhagen-based A.P Moeller-Maersk A/S (MAERSKB), the world’s biggest container line, may fall less than smaller competitors this year because its bigger ships are more cost-efficient, said Rikard Vabo, an analyst at Fearnley Fonds ASA in Oslo.

Slow-steaming, pioneered by A.P. Moeller-Maersk’s container unit, Maersk Line, helps carriers cut costs when times are tough. By sailing at lower speeds, ships need less fuel and can offset capacity stresses by using more vessels to make up for the longer sailing times.

Losing Money
With speeds unlikely to get any slower, the industry is growing more vulnerable to rising fuel costs, and all container lines are now losing money, according to BIMCO, the biggest international shipping association.

“The potential for further slow-steaming seems to be of little significance to the overall market balance,” said Peter Sand, a Bagsvaerd, Denmark-based analyst at BIMCO, whose members control 65 percent of the world’s tonnage. “Compared with the 2009 crisis, we don’t see the same level of idling.”

That’s the message the industry is hearing from advisers including Paris-based Alphaliner, which estimates that slower- steaming may even start raising costs for carriers as they deploy more vessels to meet demand.

For a nine-week trip with ships that carry 8,500 containers, a carrier can cut 3 percent of costs by slowing to 17.2 knots from 19.8 knots. Slowing further to 15.2 knots, by contrast, actually pushes up costs 0.5 percent as the expense of operating the additional ship starts to outweigh fuel reduction, Alphaliner estimates.

Slow-steaming, coupled with idling ships, helped turn a 2009 industry-wide operating loss of $19 billion into a $17 billion profit the year after, according to Drewry. The industry reverted to a $5.2 billion loss last year and prospects for 2012 are “dire” because the gap between supply and demand will grow even wider, the London-based consultant said in a Jan. 4 report.

Meanwhile, freight rates earned by carriers weren’t enough to cover fuel costs in the fourth quarter, according to BIMCO’s Sand. The price of container-ship fuel rose to a record on Jan. 20, up 32 percent from a year earlier, according to a Bloomberg index on global average prices for 380-centistoke bunker.

Global freight rates dropped on average 25 percent last year, according to RS Platou Markets AS. Prices fell the most on Asia-to-Europe routes, where the decline was almost 60 percent, the Oslo-based broker said in a Jan. 4 note.
“The container market can’t stay at this level for a prolonged period of time as everyone then will basically go bankrupt,” Vabo at Fearnley said. “It’s at unsustainable levels.”

The story at Bloomberg shows how unsustainable the situation in container-shipping has become. The oil price is at record levels, while the price for dry bulk and container-shipping are the lowest in years. 

This is a tell-tale story of the enormous overcapacity that is currently present in the shipping industry. Hundreds of container ships have been built during the last ten years, especially in Asia and this would normally mean that the prices would remain very low for years to come, until this glut of vessels has been removed.

The unsustainability of the situation means that it might be time for a giant shake-out in the container shipping industry.  Unless... the largest shipping companies did indeed make illegal price agreements to increase prices sharply.

So if the story in the NRC of today is indeed right, the largest container shipping companies turned to the illegal, but understandable measure of making price agreements. And after reading the story in Bloomberg, can you really blame them for doing so?

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