By Kang Yi (康怡)
Issue 621, May 27, 2013
News, page 4
Translated by Chi Yi
Original article: [Chinese]
This is an extended abstract of an article that appeared in this week's edition of The Economic Observer, for more highlights from the EO print edition, click here.
With the busy season for China’s container shipping industry approaching, a quiet price war is brewing.
On May 20, Maersk Line, the largest container ship operator in the world, announced that effective July 1, it would raise the price for shipping on each 20-foot container to $750 on several Asia-Europe routes.
This came a week after the German shipping company Hapag-Lloyd also announced its 20-foot container shipments on similar routes would increase to $1,000 on Jul 1. It said a further $500 per container fee would be added during the busy season from Aug 1 to Sept 30.
Price increases in the shipping industry are nothing new. In the past, when the leading carriers have raised their rates, the small and medium-sized shipping companies have followed suit to form a kind of cartel. This has happened seven times in the past year.
However, this time smaller companies are having doubts over the Maersk-led price increase and the informal cartel is beginning to crumble. Smaller companies that are more vulnerable to a very grim market are refraining from following the bigger companies’ price hikes, and in most cases are lowering prices.
In March and April prices on these routes fell by over 40 percent. Containers on these routes must charge $1000-1200 in order to break even, but the recent price has been around $730, meaning most shipping companies are losing money.
"The supply and demand situation hasn't changed much," said Chen Ge (陳戈), an expert in the shipping industry. "The falling prices can only mean one thing: the present cartel-like union is no longer very closely united. All those companies are looking forward to the coming busy season. They want to get market share before others, which has resulted in a price war.”
An agent at a freight forwarding company confirmed this. “We’ve been lowering our shipping rates recently,” he said. “Everyone else is doing it. We don’t have a choice.”
But what worries Chen Ge the most is the runaway addition of shipping capacity led by Maersk and China Shipping Container Lines (CSCL). In late April, CSCL ordered five new vessels capable of shipping 18,000 20-foot-containers. Since 2011, Maersk has ordered 20 of these ships. Data from Braemar Seascope shows that in the first quarter of 2012, 30 vessels capable of shipping 270,000 containers altogether were ordered - six times more than last year.
Shipping companies are continuing to buy ships amid a gloomy market for two reasons. Firstly, because of the poor market, the prices of these ships are at historic lows. Secondly, newer ships have better technology, which helps companies to improve their cost efficiency.
However, many are concerned that other companies will follow the lead of Maersk and CSCL in making these purchases and worsen a market already troubled by excess shipping capacity.
Zhang Shouguo (張守國), deputy chairman of China Shipowners Association, opposes these purchases on the grounds that they amount to speculation. "The shipping capacity is now 30 percent higher than demand in the market," he said. "Investors buying new vessels won't only cause losses for themselves, but will also worsen the situation of the entire shipping market."
