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Executive Summary

The link between falling rates and rising deployed liner vessel capacity

was scarcely more evident than in the second quarter 2011. On key

lanes from Asia to the United States, rates plummeted as capacity rose

or held steady while demand grew marginally. In some cases—as from

Busan to New York, or from Shanghai to Savannah—the rate drops

were monumental.

 

Notably, rates from Asia to the U.S. West Coast fell less sharply in the

second quarter than those to the key East Coast ports of Savannah and

New York, despite capacity on most major lanes to Los Angeles-Long

Beach and Seattle rising in the quarter.

On the bellwether lanes of Hong Kong/New York and Hong Kong/Los

Angeles-Long Beach, capacity rose in the second quarter, which affected

rates. At the end of June, Hong Kong/Los Angeles-Long Beach capacity

was 25 percent higher than 12 months earlier while rates were 33

percent lower. Hong Kong-to-New York rates fell 18 percent in the

second quarter as capacity rose 14 percent in the same period. It’s hard

to deny the impact capacity has on rates on key U.S. inbound lanes.

 

The industry largely failed to meaningfully reduce transpacific capacity

in the slack season, outside of one pulled service and a couple handfuls

of skipped sailings. Retailers have chosen to burn through their

inventory, operate in leaner fashion, and not restock, with U.S.

consumers still subdued.

It’s also clear that spot rates are hurting contract rate levels. Carriers

used spot rates in the second half of the first quarter to buoy low load

factors, but those rates have stuck more stubbornly than carriers would

have wanted, contributing to hundreds of millions of dollars of lost

revenue in the first half.

 

Export rates to Asia stabilized in the second quarter, but remain way

below the levels seen in fall 2010, as the introduction of headhaul

capacity has hurt carriers’ efforts to effectively manage backhaul capacity.

Also, it’s becoming hard to ignore the rise of direct service capacity to

the United States from the Cai Mep deep-sea complex in Vietnam, as

well as from Mumbai. Capacity from those two ports clusters is

surpassing that offered by carriers from the traditional transshipment

hubs that have long served them—namely, Singapore and Colombo. In

the case of Cai Mep, direct rates are competitive to those offered from

Singapore.

 

The question in the third quarter is whether liner carriers will tire of

seeing red ink and retrench supply in an effort to wrest back control of

the supply/demand balance as the industry enters peak season. If early

July is any indication, they appear willing to take some hard measures

to reduce deployed capacity, with a handful of services pulled.