Ocean Carriers’ Internal Battle

The trans-Pacific eastbound trade is taking considerably longer than in the past to settle annual service contracts that will run through next April. With several contentious negotiations apparently having occurred with so-called champion accounts, everything else has been delayed. Some ocean carriers walked away from large deals, while others are walking into them even at rates that appear to be below costs. New services through the Suez Canal are being seen and felt, with rates to the U.S. East Coast reflecting the use of larger, more efficient vessels.

There also appears to be some significant strategic differences among the carriers, with one leading by example by removing capacity from the Asia-Europe and Asia-West Coast trades to try to support higher rate levels. All other carriers, however, apparently are doing what’s been written about for the past couple of years: cascading larger vessels into the trans-Pacific as their new, larger vessels enter the Asia-Europe trade.

The questions for the year ahead are familiar: Will carriers manage capacity in a way that allows them to maintain or increase rates, something they did fairly well in 2012? Was 2012 a wakeup call? After all, after signing contracts with their champion accounts, the carriers suddenly confronted a sea of red ink. They responded by increasing rates on smaller beneficial cargo owners and non-vessel-operating common carriers to make up for the apparent mistakes made with the larger BCOs. Have they done it again in 2013? And will they react in the same way?

Most people I talk to believe the new schedules with primarily larger ships will create a supply-side condition that will pressure pricing and not allow the multiple general rate increases such as those seen in 2012. That thinking would explain the contentious negotiations with champion accounts, those with the large, sophisticated and knowledgeable staffs that ask the legitimate question: “How can rates go up with these conditions?” 

Still, some carriers walked away from demands they saw as too low, something rarely seen in the past with these accounts. Others, meanwhile, accepted the conditions put before them, choosing the volume commitments and filling a larger portion of their capacity.

What does this tell us, if anything? That, in essence, nothing has changed, that there are those who will accept cargo to fill their ships regardless of the financial outcome? That some have concluded it’s better to walk away from large freight volumes they deem non-compensatory in favor of much higher-paying freight, even it means handling less cargo with smaller vessels?

Well, both are true, and it seems some carriers learned valuable lessons in 2012. One of those lessons was not to be blinded by volume alone. Another was that freight from smaller BCOs and NVOs, once considered undesirable, suddenly is very attractive, often resulting in rates a few hundred dollars higher than for those champion accounts.

Look closely at first quarter volumes in the eastbound trans-Pacific and who moved them. While many carriers had to live up to their volume and rate commitments laid out in their contracts with large shippers, many shifted away, choosing to move the more attractive spot market freight. NVO freight accounted for more than 60 percent of total volume, an astonishing number. Carriers that in the past filled just a small portion of their capacity with NVO freight — choosing instead to focus primarily on BCOs — are changing their thinking, and their strategies.

Sure, some carriers still want to tie up the large-volume BCO accounts, almost regardless of rates. Maybe in 2012 they moved smaller portions of that freight and a lot more of so-called c.i.f. NVO freight, which is also very low-rated. By their thinking, it’s better to have more of the BCO freight and, for them, maybe the strategy is right. But to what end?

Not many carriers made money in 2012, and none made a truly reasonable return by almost any investment measurement. If we’re in a cycle — beginning in 2009 — in which every other year is relatively good (2010, 2012), 2013 should not be a good year for carriers. And if some of them had a bad year in 2012, are we approaching the time when only a few will make money until there is a significant shift in the marketplace, such as a global economy that’s growing at 8 percent a year or more, or when there’s a carrier shakeout?

It’s a very costly time to be involved in the ocean shipping business. Shipowners must invest in more efficient vessels that, while having high capital costs, are relatively cost-effective on the operating side. With capital being hard to come by, and a history of low or negative returns, how many of the carriers we see today will be there in 2015 or 2016?

I’d say there will be fewer, for sure. The interesting thing to watch will be to see by how many. 

Gary Ferrulli, a veteran of nearly 40 years in the shipping industry, is director of export carrier relations for non-vessel-operating common carrier Ocean World Lines, a subsidiary of Pacer International. Contact him at mrgtf4811@mindspring.com. The views expressed here are his own and do not necessarily reflect those of OWL.

 

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