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Concerns Over Freight Rate Slump Are Overstated, Analyst Says

Jun.19--RS Platou Markets analyst doubts container carriers will engage in rate war
Concerns over a slump in container freight rates are overstated because lines are desperate to avoid a rate war and will suppress box slot supply to maintain profits, according to one leading expert.

Rahul Kapoor, a Singapore-based shipping analyst at RS Platou Markets, said concerns about demand were valid but he doubted whether carriers, after already booking poor results in the first quarter of this year, would resort to the same market-share-seeking pricing tactics that pushed them to the brink of collapse late last year.

“We believe the concerns of a rapid decline in freight rates from current levels are greatly exaggerated,” he said, adding that he thought carrier earnings had turned a corner in the current quarter and the industry would see modest profits over 2012.

“We do not see a sharp decline in rates as we believe that market share fights are no longer an option even for the biggest player, Maersk Line,” he said.

“Our view is that the industry cannot fund another price war, the cash buffer in 2012 is absent unlike the start of 2011 when the industry was coming out of a record 2010.”

The formation of four alliances controlling some 85% percent of weekly Asia-Europe capacity should also help maintain liner discipline.

“The alliance partners are not incentivised to undercut prices and benefit from better capacity utilisation and cost efficiencies,” he said.

This would see lines idle ships again after the European peak season, creating a buffer on active supply.

“We expect Asia-Europe spot rates to find support at $1,500 per TEU and see rates closer to those levels for the remainder of the year with still some upside left for Transpacific rates,” he said.

He was positive on trans-Pacific demand, with a demand recovery gaining a foothold as a nascent housing market recovery boosts imports, but warned there remained the possibility of negative demand growth on the Asia-Europe trade.

“A resolution of the European crisis remains the key for global container shipping recovery,” he said.

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