The Shanghai Containerised Freight Index (SCFI) is adding fuel to the fire of volatile container shipping rates, exacerbating lines' difficulties in raising rates in an environment of overcapacity, according to NYK Line chief executive Jeremy Nixon.

In an interview with Lloyd's List during the Global Liner Shipping Asia conference, Nixon said:"We need to somehow find a way in collaboration with our customers to have more stability in the way that we price."

He said container shipping had become a commoditised industry, where rates were set by supply and demand, but the supply and demand side had currently lost its equilibrium due to various factors, leading to volatility and sharp swings in rates

"One area that probably doesn't help the situation is the Shanghai Containerised Freight Index, which offers complete transparency to what the spot market is doing week by week and that is simply exacerbating the situation."

Nixon said container shipping had become a commoditised industry, where rates were set by supply and demand. But the supply and demand side had lost its equilibrium, leading to volatility and sharp swings in rates.

"Carriers cannot control prices," Nixon said. "We live in a regulatory environment where players cannot come together and decide on pricing levels. The ability to control price is simply not there and we are working on pure economics, which is why we are seeing such volatility."

This was good for neither lines nor their customers, he added.

"I know our customers hate it; it also adds a lot of complexity into the way we do our business in terms of trying to forecast results and how we do our invoicing."

An emphasis on spot market pricing was distorting the industry, Nixon said.

"Some customers want to be on long-term contracts and some want to work the spot market, we understand that, but if you want to have a spot rate that's what you get this week, subject to space and equipment. But if you want a long-term contract we have to protect that space and keep the customer happy, and we can't mix up the two. But that's where we've got to in the industry at the moment, where there's a lot of complexity and pricing volatility."

The impact of this volatility can be seen in lines'financial results over the past couple of quarters. The 16 of the top 20 lines that report financial data reported an average operating margin of just 2.6% in the second quarter, which while positive in some respects, is not good by any industry standard.

However, within those figures lies a large range of numbers, with lines such as Wan Hai delivering an operating margin of 11% and others working in negative territory.

"Fortunately, at NYK we're in positive territory but we continue to be buffeted by the global markets," Nixon said.

There were several factors behind the spread in results, Nixon said, but an apples-to-apples comparison was not always easy.

"Some carriers are adding their logistics businesses into their results, some their terminal businesses. Others include shipbuilding subsidies and there is some beautification of results ahead of IPOs, so there are quite a few moving parts."

But overall, scale was an important factor.

"We are in a business of economies of scale and the larger you are the more you can dilute down your administration costs," Nixon said. "If you get caught in too many long, thin trades you get caught out there."

The second consideration is where each carrier is in its investment strategy. "Some are well down the track in having ordered and built big ships, and there is no doubt big ships help. If you can deploy 14,000 teu vessels and not 8,000 teu ones you have an advantage. On the US east coast if you can deploy 8,000 teu-9,000 teu ships instead of panamaxes that makes a big difference."

The third thing was the speed with which a line could accelerate its own performance.

"You might have all the steel and all the IT systems, but I still believe this is a people business,"Nixon said. "It's about managing, motivating and getting performance out of your team. If you've got good teams focused on costs you can outperform a larger carrier that doesn't have that urgency."

Nixon was more sanguine on the ordering spree that has led to overcapacity in the market, particularly on the Asia-Europe trade lane and where the lines stand accused of exacerbating the supply and demand imbalance.

"Ships are long-term investments that take 18 months to three years in the planning cycle," Nixon said. "When you order a ship you don't just order one, but a set of them, to operate a loop. It does take some crystal ball-gazing and some lead time to bring the assets online. As we've seen this year, suddenly you get a change in the demand situation and demand can contract or expand much more quickly than we can control the supply side."

Nevertheless, ships were still needed, he said.

If the overall market globally is about 170m teu laden, even with a 3% growth in trade you still need 450,000 teu of standing slots a year. Even if you use 22.5 years as the age for scrapping ships, on a fleet of 19m teu today, 800,000 teu is needed just to replace that. If you add that up you need about 1.3m teu a year to stand still.

"The problem is that over the past couple of years we've been adding about 1.5m teu-1.6m teu, which is in hindsight over the top in relation to where the demand picture is now, but we still need to order."

The complexity was that most of the ships that had been ordered in the past two or three years had been larger ones that are focused on the Asia-Europe trade, which accounts for only 22m teu out of the global 170m teu.

"A lot of carriers have ordered the right number of teu,but they've just decided largely to put them all into one asset class and all onto one particular trade, which has then kicked off this massive cascade that we're going through now," Nixon said.