Carriers’ windfall: crafty or lucky?

The focus among most of those involved in international logistics in the U.S. today revolves around the ongoing negotiations between the International Longshore and Warehouse Union and the Pacific Maritime Association and the impact of the talks on access and costs to container services. Capacity to ports on the U.S. East Coast is at a premium, boosting spot rates for carriers.

During what some are now calling planned protracted negotiations, shippers continue to make the U.S. East Coast a priority, fearing disruptions on the West Coast. The fear has short- and long-term effects. First, in moving some freight away from the West Coast, shippers are filling vessels to the East Coast. Second, the market may be moving goods earlier than usual to avoid any disruptions, because not only are the ships full to the East Coast, but those serving the West Coast also are operating at high utilization levels.

In a sense, this is an early peak season, and the rate increases associated with peak season are certainly in play. Spot rates to the U.S. East Coast are more than $4,000 per 40-foot container, in some cases $4,200-plus. The increases are less severe on the West Coast, but they’re still there.

This is, of course, good news for ocean carriers, which are getting much-needed additional revenue from the spot market with the possibility that the third quarter will be a decent, if not exceptional, quarter for them. The first two quarters certainly haven’t been successes for most, so it appears carriers are taking what advantage they can of the current conditions even if it only affects 30 percent of their business.

The interesting issue is the suggestion that this was somehow planned, that, noting the reaction of the market in the early stages of ILWU-PMA negotiations, the carriers decided to lengthen the time frame for talks. They knew the issue over the $150 million in taxes the industry faces under the Affordable Care Act would be contentious and they used it as an excuse to lengthen the negotiations while the work at the ports and terminals continued virtually unaffected, and the cargo continued to move in relatively heavy volumes.

Are they that clever? Not many would accuse them of that based on history; when they had antitrust immunity and conferences, they never really took advantage of it. Have they evolved since they lost that authority? It almost seemed so in 2010 when they collectively anchored more than 600 vessels and got rates up and stabilized, to the point that they all made money that year. But they haven’t repeated the action since, and the industry has lost billions of dollars.

So, is this another one-time incident, with no ongoing effort to change the supply-demand ratios, absent the attempts at doing so through now the 2M, G6 and CKYHE alliances? Or are the carriers betting on this being a true upward swing in global volume that will last beyond October?

With all of the apparent financial issues the vast majority of carriers face, one would think they they might not want to make a short-term adjustment, but base their decisions on the long term. Nothing in the immediate future indicates that many of them have made that long-term decision, especially those on the fence about ordering vessels large enough to be competitive in the long-haul Asia-Europe market.

Mediterranean Shipping Co. apparently sees the benefit of having the mega-ships, using an intermediary to order three 19,200-TEU vessels. Many other carriers appear to be like deer caught in the headlights of an approaching car, knowing the oncoming lights are dangerous, but afraid to move.

Their bottom lines, meanwhile, continue to be poor, at best. A lot of conjecture exists as to why there’s so much hesitation and no need to speculate. But simply put, as I have said on numerous occasions, carriers that don’t have the larger vessels — which I define as 18,000 TEUs and up — can’t be competitive in the Asia-Europe market, so why be there? Are they betting that the low-cost carriers will allow rates to rise to enable the higher-cost carriers to survive, enhancing their own bottom lines in the short run? Or might the low-cost carriers simply bide their time until some that are losing money in that market decide to leave? In a sense, it’s a no-lose situation for the low-cost carriers, and a no-win situation for the others.

It’s hard to imagine conditions such as this in other mature industries, but the ocean carrier industry isn’t a typical mature industry. The labor issue on the West Coast, however, has brought about interesting conditions typical of our favorite industry. What’s next?

Gary Ferrulli, a 40-year shipping industry veteran, is president of Global Logistics and Transport Consulting in Chandler, Arizona. Contact him at mrgtf4811@mindspring.com.

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