Not So Merry Merry-Go-Round

To paraphrase Bette Davis in “All About Eve:” Fasten your lifejackets, it’s going to be choppy sailing in 2013. Container shipping lines face another year filled with “unpredictability and volatility,” as efforts to reduce overcapacity won’t be enough to free the industry from the “vicious cycle” of fluctuating rates, Hua Joo Tan, executive consultant at Alphaliner, said at The Journal of Commerce’s 6th Annual TPM Asia Conference in Shenzhen, China, last week.

It’s the same old refrain: Carriers’ ability to inject capacity on short notice — a function of an overhang in capacity that has lingered since the 2008 financial crisis, won’t only exacerbate volatility but also will crunch the container rate cycle further, putting an anchor on carriers’  balance sheets and leaving shippers to only dream of some level of stability.

“The lows will be even more severe than in the past, and the highs will be extremely short-lived,” Tan told an audience of more than 500. “The duration of this overhang is completely unprecedented.”

Short-term efforts to curb overcapacity, such as idling vessels and slow-steaming, are just that: short-term actions that fail to remedy the larger imbalance. The capacity overhang will be a sword of Damacles that will plague the industry at least through 2013, if not beyond. Despite this year’s moderate growth in volume that is expected to continue in 2013 at a 4 to 6 percent clip, “carriers’ ambition to grow market share has not diminished in any way,” Tan said in reference to new vessel orders and as a rejoinder to those who say carriers have shown more discipline this year.

Carriers haven’t been able to curb their hunger for more capacity, either. As Tan puts it, “Carriers will continue to shoot themselves in the foot.” The share of idle capacity as a percentage of the overall fleet will rise from 4 to 6 percent during the next 12 months, but there will still be excess space of roughly 10 percent. The reactivation of idle capacity has made rates more volatile, and Tan expects to see even more capacity brought back into the market during the next 12 months.

The modicum of good news is that the container shipping market will be better in 2013 and continue to improve in following years, Cosco Group Director and President Ma Zehua said in his keynote speech. “The drastic volatility of the industry over the past two decades not only threatened the interests of consignors and shipping companies, but also harmed the stability and sustainability of services in the industry,” he said. “We cannot go through history once more; we need a new type of cooperation.”

Cosco’s new partnership on domestic trades with fellow Chinese carrier China Shipping is the first tangible confirmation to years of rumors that cooperation or a merger could be part of the solution. Although the company will begin a joint domestic China service this month, Ma declined to comment on whether the two ailing carriers would merge.

“The leadership in recent years for these two companies has had much interaction,” he said. “There is much speculation on what we will do together. I cannot tell you whether we will merge; I will have to let you guess.” 

Talk of carrier consolidation is premature, however, Tan said, citing the fact that there have been no mergers since the 2008-09 financial crisis and recession, and despite the financial woes most carriers have suffered. Investors and governments’ ill-advised decision to pour money into ailing carriers will keep consolidation at bay. That means carriers can only tie themselves to the mast as the larger needed structural changes sluggishly come about.

For carriers, these solutions rest in more restrained ordering of vessels and a willingness to “take one for the team” by not being perceived among their peers as adding to the problem by deploying more capacity while others are cutting it.

Such hopes are dampened by a legacy of failed attempts to curb overcapacity and unrelenting pressure to maintain or increase market share, not necessarily to achieve global dominance at the expense of competitors, but often to fill mega-ships that, without rate cutting, would be sailing at a loss.

Failure to break the habit will make the relationship between Margo Channing (Bette Davis) and archrival Eve Harrington (Ann Baxter) seem downright healthy compared to carrier-shipper relations.

In other words, 2013 is going to be a helluva show. 

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com and follow him at twitter.com/PeterTirschwell.

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