Thursday 22nd Nov, 2018

SPECIAL REPORT: Liner Trades to SE Asia

Photo: Shutterstock
Photo: Shutterstock

AN IMPRESSIVE 58.9 million tonnes.

That’s the total Australia-wide grain harvest for 2016-17 – up 49% on the previous year – and it’s proving an absolute boon for shipping, bulk and container, and for the Southeast Asia trade container lines in particular.

“Busy is good,” says a senior manager apologising for struggling to find time for an interview. “We knew the end of 2016 was going to be strong but it’s continued through the first quarter of 2017 and might extend out to the end of March, early April.”

Another is even more bullish, predicting three good quarters that just might take carriers through to an expected bumper crop of that perpetual disappointment, cotton, this year estimated to reach 4.5 million to 4.8 million bales.

All this couldn’t come at a better time for the SEA trade, which has struggled with overall export momentum for some years. But it has brought its own issues, especially with equipment, of which more shortly.

In 2015 figures southbound trade from SEA rose around 6.1%, to 579,535 teu, while that from the Indian sub-continent grew by 7.2% (to a still modest total, nevertheless). But while northbound to the ISC leapt a more startling 31% in 2015, SEA northbound actually slipped back 4.7%.

2016 has seen those trends continue but at lower levels. Southbound from SEA (including ISC) grew a more subdued 4% or slightly under, while northbound barely improved by 1%, although ISC was up 7%. Once again last year cotton fell short, and transhipment to the Middle East via SEA services slipped back 8%. But there was a strong 15% lift in imports from Thailand and Vietnam, highlighted by garments and electrical/whitegoods, and strength in foodstuffs from Malaysia and Thailand, and from India, from which a lot of European manufacturers are now said to be sourcing produce.

Carriers say trans-national are slowly but steadily shifting production from East Asia, as Chinese labour costs and conditions rise, to Southeast Asia and the ISC, with the logical logistical impact.  As yet the closure of Australia’s car manufacturers does not seem to have affected parts sourcing but carriers have some expectation change will follow General Motors and Toyota’s conversion to pure vehicle imports.

But let’s get back to grain.

“Increasing quantities have been moving in containers, year after year, but this season there’s just so much around there’s plenty for the bulk trades and possibly more than enough for us,” one line manager suggests.

“I think all carriers are pretty full northbound, from all ports. Certainly ships are deadweighting-out very early … there’s cargo being turned away on every sailing, although whether it’s a matter of demand exceeding supply or some customers declining to pay their way, I’m not sure.”

The containerised grain wave began in Queensland before spreading to NSW and then Victoria, and even South Australia, another carrier reports, saying that the well-publicised shortage of food-grade 20 footers “pretty much surfed the wave”. What is usually a surplus of 20s began to evaporate in November and carriers have been scrambling ever since.

“Unfortunately SEA carriers are not full southbound at the moment – a seasonal thing, and tied to Chinese New Year to some extent – just when we desperately need those 20s,” one laments.

Western Australia is said to be slightly better off as far as boxes go, despite a record 16.62 million tonne crop there, and is seeing a lot of its containerised grain heading to China (via SEA relay) whereas East Coast and southern Australia shipments are particularly strong into the ISC – good news for the dedicated SEA lines and the through carriers.

“Some carriers are better placed than others to meet the demand and profit from it,” an insider admits. “We’re sourcing and filling every single box we can find. And for the first time in years we’re actualy in a position to fully cover costs on upgrades, to actually get back what it costs us. We’ll take what we can while we can!”

Other northbound cargoes have been relatively stable, with metals/minerals softer from WA but still solid, a ‘mixed bag’ for meat due to reduced Australian production, and fruit and vegetables seasonally steady.

And so carriers are looking forward to the cotton crop, even if there could be equipment headaches again: “A big crop could make things interesting, there should be a fair bit moving, especially into Pakistan and Bangladesh but probably also into China.

“But we’ve been let down before, several times actually, and this is what makes planning for adequate equipment so difficult and frustrating. I’m not sure customers want to understand it’s not a tap we can tunr on and off at no cost. We certainly don’t get much sympathy … .”

Meanwhile, for the first time is several years shipping lines and importers and exporters will need to come to terms with some upheavals in long-established SEA partnerships and services.

November news of further ructions in the North & East Asia trades was not unexpected but the flow-on to the SEA arena was initially missed by large sections of the industry.

MOL announced its May 2017 departure from the NEAX consortium, to join a new grouping of Maersk, MSC and Hamburg Süd on the China-Australia run and to become a partner on Maersk’s unique N&EA-Australia-SEA-Australia-N&EA Boomerang service.

It was only careful reading and comparison of the various carrier announcements that brought to light the new agreement applied not only to the N&EA leg of Boomerang but also the SEA section, meaning MOL was also quitting Triple A (the Japanese line had been a founding member of both NEAX and Triple A). MOL also gains improved access (to Australian ports) on Maersk’s NZ-focused Northern Star and Southern Star loops.

The news appears to have taken the remaining Triple A full members OOCL and PIL, and part-member Yang Ming Line, by surprise – and at time of writing there had still been no official announcement about the future of Triple A post MOL’s departure. Ove recent months speculation has swirled around the possible recruitment of a replacement member – Hong Kong’s TS Lines often mentioned in dispatches – or of a more widespread shake-up amongst SEA consortia.

However, usually reliable industry sources now believe OOCL and PIL will carry on as prime movers but will implement a long-expected reduction of the service from two weekly strings to one, replacing a total of nine 4250-5000 teu ships with six of 5500-5700 teu. In the process YML, which has been providing one ship in one loop (although without full-ship slot allocation) will revert to a space-chartering role. No new members will be sought or admitted.

“OOCL and PIL will maintain their current capacity. Brisbane will have to be dropped because the replacement ships are too deep-draught for the Torres Strait but I believe all other ports, including Laem Chabang [added to the Torres Loop last year) will still be in,” sources indicate.

The rationalisation will not have the impact on the trade that might be first thought, given that MOL volumes will depart to Boomerang (where the 12-strong fleet has been upsized over the past year). It is not known if YML will keep its current allocation, nor whether modest slotter Cosco Shipping will remain. Rivals estimate total trade capacity will shrink by only c.800 teu per week.

“It’s not as good as CKA [the withdrawal of a complete consortium/service from the N&EA trade last May] but any reduction in space is a good result,” a rival says.

Triple A insiders concede that, given present export demand, “now is probably not the ideal time to be downsizing” but it seems clear the group has been bearing the expense of a nine-ship, two-string system for too long – and unprofitably.

“Their set-up has its origins in the past priorities of previous as well as current members,” one observer notes, “and arguably it has been well in advance of what the market wanted or needed. Twice-weekly departures from main ports was nice-to-have but not need-to-have … it’s not as though there weren’t plenty of other options for shippers and not as though there’s been any squeeze on space for 90% of the year.”

“Triple A was the premium service for transits, frequency and port coverage,” says another watcher. “But were they getting premium rates?  I don’t think so!”

And rates remain a complete bugbear for the trade.

As this review has often emphasised carriers have little ability to control SEA freight rates because so many of the slots are filled by out-of-scope cargo, ie that originating in and/or destined for other parts of the globe via hub transhipment in Singapore, Port Klang and Tanjung Pelepas. Much of that cargo is carried under master contracts, or at rates dictated by port-to-port deals struck elsewhere, leaving little flesh on the bones for the last or first legs and pacing a very effective ceiling on the levels SEA lines can achieve.

“Like shit on a shovel,” one executive pithily says, “they’ve been stuck for years.”

“In my three or more years in this [trade manager’s] position they might have moved but only in the wrong direction,” another concurs. “Since 2014 they’ve just been frittering away to the point of unsustainability.

“It’s just plain stupid. Lines are just their own worst enemies, even in a market that’s been relatively strong over that period. They’re still driven by market share even when ships are 100% full. Hanjin should have been a lesson to all but no, rate increases don’t hold.”

The manager says some carriers persist in offering southbound rates that are below their fixed operating costs – “losing money on every box” and still have to bear the burden of getting the empty (mostly 40-footers) out again. In the case of northbound, some of those same carriers, and others, again offer rates below costs just to re-position their containers out.

 “Two-way losers,” another executive fumes, “but they dictate the market, that’s the way it goes. Nothing should justify rates that don’t even cover operating expenses.”

A third complains that certain lines have been marketing discount rates “even though they don’t have the space and they certainly don’t have the equipment … what the hell is going on?”

Then there is the propensity for some players to offer all-in rates, leaving competitors little opportunity for full cost-recovery through typical surcharges and extras, another common complaint amongst the ‘good guys’ – though experience tells us getting someone to own up to being a miscreant is a Quixotic quest.

Surely, though, the combination of some reduction in two-way capacity and many solid months of strong export volumes will give carriers their best shot in years at getting the SEA trade back on the right side of the ledger.

“We can only hope,” an unusually upbeat insider says. “We have been able to get northbound rates up by $50-100 but we need at least $300. But I’m seeing shippers experiencing some light-bulb moments, realising they’ll just not get containers, or get those containers away, if they won’t pay for upgrades or an acceptable, realistic rate.”

So there’s a feeling that circumstances might be right for a trade-wide re-set, founded in an agriculture-led recovery?

“Yes,” one insider asserts. “Thank God!”

From the print edition February 23, 2017

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