Box trades from Asia 'unlikely to get much worse'

http://www.lloydslist.com/ll/news/box-trades-from-asia-unlikely-to-get-much-worse/20017608731.htm;jsessionid=13ACF267B6D9FF17300DC35DFDA41111

MARKET conditions on the container trades from Asia are unlikely to get much worse, but no improvement is expected in 2009, according to a report from JP Morgan.

“Currently, we believe, the freight rates in Asia-Europe are below the variable costs and the freight rates in transpacific are only a touch above — both markets are loss-making, factoring in fixed costs,” said Hong Kong-based JP Morgan analyst Johnson Lueng, in a report on the Asia Pacific container shipping sector.

“We do not expect any meaningful improvement this year, but we believe the trade is unlikely to get a lot worse, as operators are likely to save some losses by parking their ships rather than running them.”

On the Asia-Europe trade, with container rates below variable cost, carriers were seen as losing their incentive to run services.

Variable cost from Asia-Europe was estimated at $489 per teu while the all in freight rate was put at just $400 per teu, which after stripping out bunker and terminal handling charges puts the freight portion at almost zero.

The transpacific trade turned loss-making in November, with a 30% drop in the contracted freight rate.

As with Asia-Europe, the rate was seen as barely covering variable costs, leaving little incentive to lines to run services.

Overall average losses per teu on the Asia-Europe and Asia-US West Coast trades at current freight rates and bunker prices were estimated at $524 and $184 per teu respectively.

On the one side profitability was not expected to get any worse but on the other improvement was not expected either.

Profitability was not expected to worsen as the lack of profitability meant some operators would rather not run their ships; the impact of lower operating costs such bunkers and equipment rentals; and the worst of the volume contraction may have been seen brought about by the credit crunch in October and November.

However, improvement was also seen as unlikely due to peak capacity growth being postponed from the fourth quarter of last year to first quarter 2009, and the retail industry in the US and Europe was yet to hit a bottom.

The pushing of newbuildings scheduled for delivery in November and December last year into this year has made the orderbook for 2009 substantially larger than before.

“The challenging environment could continue in 2010 until a demand recovery narrows the demand-supply gap and improves the level of profitability in the sector,” the report said.