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Ocean Carriers’ Big Splash

What’s going on with the world’s container carriers? Maersk Line and other large carriers say they’re no longer seeking additional market share. Maersk dropped plans to buy a final 10 18,000-TEU vessels, and executives say it may be a few years before it orders more ships because of an expected slowdown in container volume growth. It says it won’t hesitate to pull additional capacity this year if volumes don’t hold up.

Meanwhile, trans-Pacific carriers, having succeeded in implementing two rate increases in January and March, are attempting a third in April as a prelude to May 1 contract renewals. A 100 percent increase in Asia-Europe spot rates is holding. Idled capacity is rising, with some 8,000- to 13,000-TEU ships now on the sidelines, according to industry analyst Alphaliner. At nearly 6 percent of the global fleet, idled tonnage is at its highest level since spring 2010.

Investment analysts have turned positive on the sector, despite Europe’s economic woes and skepticism surrounding the U.S. recovery.

Simply put, a pronounced shift in the container pricing environment is under way, a development few anticipated late last year. If sustained through the year, shippers will pay higher prices, obviously, and carriers will climb out of the red. One reason above all explains what is happening: the rapid increase in fuel prices — up 35 percent last year alone — and the possibility prices could spiral still higher, even with last week’s decline.

There’s little question 2012 brought with it a substantially more favorable pricing environment for carriers than the previous year, when rates drifted downward for the final three quarters and led, in the end, to what Drewry Shipping Consultants estimates to be $5.2 billion in total carrier losses.

Last year’s tone was set by a series of somewhat unusual statements from Maersk executives implying the carrier was aiming to drive smaller carriers out of the Asia-Europe market, and other carriers responding by realigning the alliance structure to better compete. The message was that Maersk, with its market dominance, saw an opportunity to drive consolidation and was willing to invest in that outcome at the expense of short-term profitability.

But although Maersk’s major competitors were bloodied, they didn’t falter in the end, just as all major carriers survived the 2009 financial crisis. Transport analysts such as Macquarie’s Janet Lewis, who last year said conditions were ripe for consolidation of the three Japanese carriers, told March’s Trans-Pacific Maritime Conference that conditions had improved such that consolidation in 2012 is much less of a possibility.

“I really don’t expect there to be any mergers and acquisitions among the carriers this year,” she said. In reference to the Japanese carriers, she added, “At this point, they don’t feel a sense of desperation, and (a merger of “K” Line, NYK and MOL liner operations) would come out of desperate circumstances.”

Maersk is again setting the tone this year, with a sea change in outlook accompanying the arrival of Soren Skou as the new CEO early in the year, replacing Eivind Kolding. Maersk has withdrawn more than 9 percent of its Asia-Europe capacity and said it has the ability to reduce its global capacity by another 9 percent as contracts on chartered vessels expire this year.

Such a statement is key: In a TPM presentation, Drewry analyst Martin Dixon said rates will rise this year, but whether carriers can pull themselves out of unprofitable territory will depend on their collective willingness to lay up capacity to maintain a favorable supply-demand environment. With the largest carrier speaking directly to this issue and idled tonnage clearly on the rise, the implication, at least at this early stage in the year, is that carriers are heading in the direction of accomplishing this.

“Rate levels are dependent on capacity removal, and further lay-ups are necessary to sustain rate momentum,” Dixon said.

A good part of what’s driving the change in carrier attitudes is fuel prices and the prospect they could go higher, especially if unrest in the Middle East spreads. It was hardly just weakening rates that led to carrier losses last year; it also was rising fuel prices and carriers’ inability to recoup the increases from shippers in the form of surcharges because of excessive competition. Carriers are realizing that in the face of the prospect of even higher fuel costs, they need to make adjustments.

“These days, it’s all about fuel costs,” said Randy Chen, assistant to the president at Taiwan’s Wan Hai Lines. “The price of fuel as a percent of our business used to be less than 10 percent. Now it’s 30 percent. When you have any cost factor that goes up three times, it ends up being something very challenging to adjust to in your business model.”