2014’s Choppy Seas

Last month, I wrote that we had to look backward before we could look ahead, and I reviewed some issues that came into play this year that likely would have an impact on 2014. I’ve had four weeks to think about 2014 and gather more data, and believe I have a relatively good view of where 2014 is going. So let’s get started.

The first thing I see is Chinese New Year on Jan. 31. That’s an early date for that event, and it comes on the heels of our own Christmas and New Year holidays and some others in Asia. That means January will be a “short month,” one that will be very busy when people return to work.

With carriers’ winter schedules in place, utilization factors out of Asia starting in mid-January should be high through the end of the month. From there, it gets a little cloudy. Where is the market really going in 2014? The experts see 4 to 6 percent growth in the eastbound trans-Pacific trade and perhaps 3 to 5 percent westbound. The European markets likely will be flat in both directions, with another year of high expectations in the north-south trades.

Once the winter schedules run their course and barring something dramatic, the supply-demand ratios will be out of whack in favor of the shippers, with supply racing ahead of demand. That tells us rates will be under severe pressure, again absent something dramatic.

What would “something dramatic” look like? Well, global trade could take a great upward swing, but why would it? Global economics simply don’t suggest that scenario. The carriers could manage capacity by using several tactics: skipping sailings as they’ve done this year at times; anchoring vessels as they did in 2010 but they have seemed reluctant to do since; or returning chartered capacity to the owners, even in advance of the charter expiry dates and paying the penalties involved.

Actually, a combination of these would be a smart thing for carriers to do in an effort to stabilize rates, instead of creating the kind of mass confusion we’ve seen this year with an increase of some sort every six to eight weeks followed by weekly reductions in rates. If you’re a beneficial cargo owner with a 12-month contract that includes clauses exempting you from general rate increases and peak-season surcharges, you’re doing just fine — you know what your rates are for more than a week at a time. But if you’re not in that category, well, your rates are rising or falling every week.

It’s very difficult to do business that way for many reasons. Somehow, the carriers seem to think it’s working for them. But looking at their financial returns, you have to wonder what their strategies are.

So where do I think this is going? My instinct, experience and understanding of the business tell me we’re in for more of the roller-coaster ride we’ve been on during the past six months. Carriers will attempt to increase rates on segments of the business on a regular basis followed by reductions for several weeks, leading up to major contracts being signed next spring.

Carriers will try to manage capacity, but it will be difficult, with the fear of losing market share and not filling ships part of the psyche that makes up an industry with so many facets and objectives by its participants that combine profitability and viability with national interests.

This isn’t an ordinary multinational industry where the sole intent is to produce a product or provide a service that generates high profits for its owners and shareholders. It goes beyond that, in many cases, and all of the objectives and interests can’t be met because global economics and the cost of viability simply aren’t compatible in this environment.

So where does that leave the various players in the overall scheme of things for 2014? For the BCOs, supply-demand is on their side absent the carriers doing what they did in 2010, and I don’t see that. I think shippers will find themselves where they were in 2013. For ocean carriers, being profitable will be very challenging as they try to control costs while remaining competitive. Like this year, few will make a profit in 2014, and I see a widening of differences between those that do and those that don’t, bringing into question the long-term viability of a few.

For third-party providers, the challenge will be to maintain high levels of service and relationships with customers while dealing with the competitive environment.

But to all of us involved, how well we manage the challenges, take advantage of opportunities and mitigate the pitfalls will be key to a successful or unsuccessful 2014.  

Gary Ferrulli, a 40-year shipping industry veteran, is director ocean product for non-vessel-operating common carrier Ocean World Lines, a subsidiary of Pacer International. Contact him at mrgt4811@mindspring.com. The views expressed here are his own and do not necessarily reflect those of OWL.

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