By  on August 25, 2009

NEW YORK — Brands and retailers are enjoying some of the lowest ocean freight rates they’ve seen in years and are likely to see only slight increases going forward.

It could take several years for the world’s major ocean carriers to dig themselves out of an oversupply issue that they spent the last decade or more creating. Prior to 2007, rising global economies and booming Chinese manufacturing capabilities spurred a binge of ship and container building. The number of 20-foot equivalent units, or TEU, handled by the Port of Los Angeles alone went from 1.7 million in 1998 to 8.5 million in 2006. Now ocean carriers like Maersk, APL, Cosco and Hanjin Shipping are contending with plummeting demand as a result of the poor global economy while new ships ordered during boom times continue to hit the seas.

Maersk provided the most recent example of just how far out of balance supply and demand has become when it reported results for the first half of the year on Aug. 21. The world’s largest container shipping company said revenues for its container segment fell by 30 percent to $9.8 billion during the first six months of the year compared with revenues of $14.04 billion in 2008. After accounting for taxes and other costs, Maersk’s container segment swung to a loss of $961 million, compared with profits of $278 million last year. The number of 40-foot containers it transported fell 7 percent to 3.3 million and freight rates were down 30 percent.

Management said freight rates during the first quarter reached “record lows” and continued to fall during the second quarter, but at a less drastic rate.

“Considerable general rate increases are required for the container market to become profitable again,” said Maersk. “At present, approximately 10 percent of the total global fleet, measured in terms of shipping capacity, has been taken out of service as a direct consequence of the market conditions.”

The company has taken 10 of its ships out of service, or 2 percent of its container capacity, and intends to scrap nine older vessels this year. However, it ended the first half of the year with a fleet of 501 container ships capable of carrying more than 2 million TEU, and more are on the way. The company said seven new ships were delivered during the first half of the year, four will be delivered in the second half, three in 2010 and 38 are on order between 2011 and 2013.

Other major shipping lines are facing similar situations. According to AXS-Alphaliner, a service that tracks the container shipping industry, the size of the global container fleet will grow 9.8 percent this year to 4,886 ships and grow 13 percent to 5,244 ships with a capacity of 14.3 million TEU in 2010. While that’s happening, AXS-Alphaliner reported that as of Aug. 1, 10.4 percent of the fleet was idle, or some 1.3 million TEU.

Brands and retailers are counting on the overcapacity to continue to keep freight rates down in the near term. Nate Herman, senior director for international trade at the American Apparel & Footwear Association, said ocean carriers have cut routes and mothballed ships in an attempt to force a bottom on pricing.

“The bottom line on apparel and footwear is demand, so far, has not picked up and if anything probably has a little ways to go down in terms of imports in the next six months or so,” said Herman.

Projections at the nation’s ports back this up. According to the National Retail Federation’s monthly Port Tracker report, released Aug. 19, the total number of imported containers at the nation’s major retail ports is expected to reach 12.3 million for 2009. This represents a decline of 18.8 percent compared with 2008 and the lowest container level since 2002.

Brands and retailers are clearly not banking on a banner holiday season either. According to NRF, the number of containers expected for October — traditionally a peak month as goods are brought in for the holiday season — is forecast at 1.12 million, a decline of 18 percent. November is forecast to be down 15 percent.

“This year’s peak season is beginning with very weak import container volume, and even though traffic is slowly building, that’s going to be the case through the remainder of the year,” said Paul Bingham, economist with IHS Global Insight, which produces the Port Tracker report.

Overcapacity has put significant pressure on freight rates for goods moving from Asia to West Coast ports. According to one apparel industry source, freight rates for goods from Asia started to decline heading into the winter and picked up momentum in late winter and early spring. The cost for a 40-foot container went from as high as $2,000 to $800, the source said.

The Transpacific Stabilization Agreement, or TSA, a collective of 14 major container shipping lines, sought to set a rate of $1,350 a container headed to the West Coast when it entered contract negotiations this spring.

“The minimum levels TSA lines intend to establish individually are well below where rates were this time last year, and in many instances below carriers’ expectations for cost recovery, let alone profitability,” said Brian Conrad, TSA’s executive administrator, on April 9. “The unnecessary panic mentality that set in during the winter months will cost this industry heavily if the rates we have been seeing continue to slide and are locked in over a period of months in a new contract.”

By this summer it was clear ocean carriers had not succeeded in getting higher rates in their contract negotiations, possibly due to the aggressive pricing from Maersk, which is not a TSA member. On July 7, TSA said it would seek a $500 increase per 40-foot container starting Aug. 10. In explaining the attempted rate increase so soon after the conclusion of contract negotiations, the TSA said its members experienced between a $1,000 and $1,200 drop in average revenue per container between October 2008 and May 2009, and that the rates its members had negotiated were not sustainable for the year.

“From an industrywide point of view, the damage is serious, and if current rates are extended out over 12 months, it is likely that the trade will encounter significant financial challenges as well as basic service sustainability issues going forward,” said W.W. Lee, chief executive officer of Hanjin Shipping’s container liner business, on July 7.

“Transpacific carriers did not make a strong enough case in their negotiations for stabilizing revenue in the coming year,” said Jack Yen, president of Evergreen Marine Corp.

An apparel industry source involved in import issues said it was unlikely the $500 increase would survive beyond October, and that most importers believed rates between $1,100 and $1,300 per container were reasonable.

“It’s probably highly unlikely that midstream any major contracts are going to be substantially altered to make up for the numbers the TSA is looking at,” said Steve Ferreira, founder of Ocean Freight Refunds, which audits freight records to reclaim improper charges. “I think the posturing is that you can pay me now or pay me later. Most importers will probably say they’ll pay later by negotiating at the proper time.”

Ferreira also lent credence to the suggestion that Maersk may be undercutting competitors on pricing.

“When you have a situation where you have extremely large capacity and ships to fill, you would be the first to be aggressive with pricing,” he said. “They’re also a market share leader and they want to keep that going.” Ferreira added that other industry experts believe Maersk’s capacity may be even greater than what it publicly states.

“Maersk is being super cautious,” he said. “They want the freight and the customer loyalty, so they’ve done a lot of things right. Their aggressive stance — you can’t fault them on that.”

Herman said apparel and footwear manufacturers are wary after freight rates spiked along with energy prices during the summer of 2008. Many expect rates to go up again at the earliest signs of economic recovery.

“They’re worried it will go up real fast again, and it’s hard to plan for that,” said Herman.

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