Friday, August 26, 2011

Freight Rates Pose Uncertainty for Long Beach Port

Volatility in trans-Pacific freight rates, trade volumes, and the global economy promise to keep market conditions at the Port of Long Beach uncertain for the rest of the year, according to a presentation by port staff on Monday.

While the port's container volumes for fiscal year 2011 – which ends Sept. 30 – remain 10.2 percent higher than FY2010, monthly volumes have swung between negative and positive territory several times since January.

In the short term, port Director of Trade Relations Don Snyder said, the major concern is that of vessel capacity and freight rates.

Snyder, speaking to the five-member port governing board, said that there appear to be some similarities developing between what occurred in 2009 and what is occurring this year.

"The problem that we saw in 2009, and we are starting to see again in 2011, is that utilization – how full the ships are – is starting to sink again," Snyder said.

He pointed out that at a certain level of utilization, typically around 90 percent, carriers go from profitability to non-profitability very rapidly.

"When you start hitting that level or lower...the [carriers] start looking at the freight rate as a way to keep their vessels loaded," Snyder said.

"So when utilization goes down, freight rates go down as the carriers react to the market place."

As an example, Snyder pointed to the Shanghai Freight Index to the West Coast which has declined steadily from about $2,900 in August 2010 to about $2,200 this August.
"This, plus decreased volume levels, leads to [carrier] losses and declining financial results," Snyder said.

Most of the carriers are reporting losses this year as they did in 2009. To balance their sagging financials, Snyder said, many carriers have or will be eliminating services and some have even withdrawn from markets altogether.

Predicated by this turmoil, Snyder said that volume uncertainty will remain through the end of the year.

On a positive short-term note, the retail sector, which drives about 90 percent of the port's import demand, is still forecasting a strong fall season for US trade, albeit tapering off through the end of the year.

The long term view for Long Beach also holds some concerns, according to Snyder, but also some positive news for the port.

On the down side, he pointed out that world vessel capacity is growing somewhere between 4 percent and 8 percent a year, while less than 2 percent to 3 percent of the global fleet will be reaching their potential lifespan annually during the same period.

The concern, Snyder said, is that if capacity once again outstrips demand as it did in 2009, freight rates could be pushed down even further. While carriers are trying to schedule new vessels based on demand, the problems, Snyder said, is that demand can swing rapidly in the short term while the process to acquire a new vessel takes many years.

On the brighter side for the port, Snyder pointed out that between 42 percent and 48 percent of all new vessels set for delivery through the end of 2013, and 61 percent of those in 2014, will be 10,000-TEU vessels or larger. And while these megacarriers will all be able to fit through the new Panama Canal locks set to open in 2014, there are very few East Coast ports currently able to handle vessels of this size.

Snyder said that this major increase in the larger vessels, which many Long Beach facilities can already handle, coupled with additional infrastructure development at the port to increase that capability, bodes well for Long Beach in the long term.
The port is forecasting an average 5.2 percent annual increase in trade for the combined Long Beach and Los Angeles ports over the long term, but port staff are cognizant that changing economic conditions may require this number to be adjusted in the near future.