The year is barely a month old, but interesting developments already are emerging. Research analyst Drewry started 2014 quickly by reporting that fewer than half of the global container carriers made money last year. Drewry’s report tracks the activities of carriers struggling to remain viable globally. Zim Integrated Shipping Services in mid-2013 pulled out of some trades. Hanjin announced it was pulling out of Poland and the trans-Atlantic after reorganizing its senior management. Merger talks between Hapag-Lloyd and CSAV are back on. These are clear signs the industry as a whole has fundamental economic problems.
In a sense, the global trade surge that ran from the late-1980s through 2006 has backwashed enough to threaten the survival of carriers, including many not mentioned above, that had blossomed during the boom. That’s because, while trade growth has waned, costs of new assets and significant elements of operations have risen.
Much of what we see is a function of another late-1980s phenomenon: the emergence of the “global shipper.” Many large companies that could produce and distribute their goods globally suddenly insisted on doing business only with carriers that had the same capabilities. Shippers in the late 1980s and early 1990s, seeking one-on-one relationships with carriers, narrowed the number of vendors they dealt with, giving them leverage with larger volumes.
Carriers, wanting to comply with shipper demands, entered joint services, vessel-sharing agreements and alliances to provide the global scope shippers said they needed. And governments reduced antitrust exemptions for carriers, allowing the one-on-one negotiations, giving shippers virtually what they wanted.
The strange thing is that few large shippers have or want global contracts. It seems they aren’t organized in a way that allows a single entity or group in their organizations to negotiate on their behalf. They are largely managed along geography or product lines and can’t or won’t give authority to one person or department to do their ocean transport bidding.
There are exceptions, of course, but of the thousands of ocean carrier contracts in this world, I’m aware of a dozen that are global in scope. Of course, the ocean carriers are challenged that same way — geographically oriented and organized — and getting a global contract from them is, let’s just say a challenge.
If the carriers didn’t rush to globalize, would there be any significant difference in the industry today? Could some have focused on niche markets instead of being hell-bent on being a global player? Some incidental evidence suggests that might be the case. While several Asia-based carriers plunged into the global fray, a few were content to focus on the intra-Asia trade. Those are the fastest-growing trades and there has been relative success there. But second-guessing won’t change the results. Carriers faced a fork in the road and had to make a choice.
Carriers have had to make another decision in the last few years: whether to build larger vessels to lower operating costs. Some decided as early as 2002 or 2003 and implemented those plans. Others followed slowly, the capital required and the infrastructure unknowns enough to slow them down.
More carriers now are making those decisions, but again one wonders whose strategies will prevail: those who see 18,000-TEU and larger vessels as the only way to survive in the long-haul Asia-Europe markets but losing the flexibility of moving those assets elsewhere should market conditions dictate; or those who prefer the flexible fleet of smaller vessels that can be plugged into and out of markets with relative ease? Time will tell.
Two more issues will impact the industry, one being the delayed opening of the new Panama Canal locks. For many, this isn’t a surprise. Most believed that some delay was inevitable with a project of this size and scope. But the recent disagreement over costs and payments looks like it could delay the opening more than a year, though the canal authority says it will open in 2015 regardless.
If it is delayed, however, the additional costs and delay in generating revenue is bad news for the canal, of course. But it’s also bad news for ocean carriers with 6,000- to 8,000-TEU ships cascading from longer-haul trades, ready to take advantage of the more accessible canal. Now what? Carriers perhaps had anticipated a delay in plans, but not in terms of the length of the delay.
Finally, on a more positive note, the U.S. offshore domestic trades are seeing an attempt at rebirth with new ships ordered and refurbishing/engine replacement programs announced. Sure, these deals aren’t about 10 or 20 vessels that we see in the global containerized market, but any announcement of vessel replacements in these trades is big news in the industry. That a 3,600-TEU vessel qualified to operate in the Jones Act trade costs more to build than a 16,000-TEU vessel for the rest of the world is testimony to why there aren’t more container fleet replacements in the Jones Act trades.
The new crude oil vessels are encouraging to those who support the Jones Act, while somewhat quieting those who would like allow foreign-built and -operated vessels into U.S. flag-protected markets — another debatable issue but good news for the trade.
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 firstname.lastname@example.org. The views expressed here are his own and do not necessarily reflect those of OWL.