Shippers’ Two-Sided Coin

A recent report about September’s South Carolina International Trade Conference, where shippers expressed concern that bigger container ships and larger carrier alliances will leave them with fewer options, sparked some quick thoughts, my first being, “You got what you asked for.”

When I joined the industry in 1972, the 30-plus ocean carriers were geographically oriented. Asian carriers served the markets to and from Asia; European carriers served the markets to and from Europe; and U.S.-flag carriers (yes, they existed then) operated between the U.S. and other parts of the world.

Cross traders were a minor part of the equation — some countries even had laws requiring cargo to move on their national flag carriers. Joint services were rare, and alliances didn’t exist. But in the late 1980s as trade truly became global, large international shippers insisted on doing business only with carriers that had global services. They wanted to deal with a handful of carriers that would deal with their global needs, not with 20 or more carriers that specialized in specific trades.

Few carriers came close to satisfying those needs, and trying to build fleets to accommodate that need would have been prohibitive, so they banded together in what was then called joint services. This gave most carriers a semblance of being global, and these joint services evolved into the alliances of today.  Alliances actually vastly increased access to more carriers for shippers, but most of them today won’t recall this transition.

Shippers also are concerned with extended supply chains brought about by slow steaming, bemoaning the additional cost of inventories, longer planning cycles and other effects, all of which are valid points. But I have a reaction to that, too: “You get what you pay for.”

Few shippers would pay more to return to 23-knot services and the fuel costs involved. Again, it’s a case of short memories. Rates today, after all, in some cases are at the same levels as 20 or even 30 years ago, despite skyrocketing fuel costs. 

In the 1970s, Sea-Land built the super-fast SL-7s, capable of 33-knot service speeds. They set transit time records in the U.S.-Europe and U.S.-Asia trades, arriving days before the competition. Problem was, no one would pay a dime more for those services. With fuel prices rising rapidly at the time, Sea-Land sold the ships to the U.S. government to be converted to “rapid deployment” vessels in case of military requirements serving distant shores.

Several years later, someone dreamt up the idea for Fast Ships, a limited service operation between two ports in Europe and two ports in the U.S., again designed to have service speeds exceeding 30 knots and arriving days before the competition’s 20- to 22-knot services. Several well-known shippers publicly said they would pay more for that service, just as they do for air freight.

After 10 years and reports of expenditures exceeding $50 million, all that existed were plans, drawings, brochures and dust. Why? Because in the end, shippers wouldn’t pay more, or enough, for the cost of the service.

So one could argue that the conditions shippers are concerned about are of their own making. But that, of course, would be ignoring the fact that they have a willing enabler in the form of an industry that easily bends to pressure for lower rates. There is a penchant for carriers to focus on filling ships and market share almost to the point of extinction. With only a handful of carriers reporting profitability in 2013 and almost the same number reporting losses of nearly $1 billion each, it isn’t an industry that the logically minded would invest in. 

Some of that in recent months is a reflection of the market, with overcapacity prevalent and likely to grow in the next 18 months or so. Most of that growth is a reflection of carriers building larger, more cost-efficient vessels, a recognition that rate pressure will virtually always exist and the only way to survive in that environment is to be low cost.

But the drive to lower costs is contributing to the overcapacity, further pressure on rates and expansion of alliances. The proposed P3 Network among the world’s three largest carriers — Maersk Line, CMA CGM and Mediterranean Shipping — has garnered much attention, as has the possible expansion of the G6 Alliance to the G10.

Some realities are becoming clear: If you don’t have large, efficient vessels, you’re not likely to survive, at least as a global player. Some may decide to change their operations and become more focused on specific trades as niche players. Others, I think, will simply disappear — either shutting down or being merged and bought out — similar to what happened with the U.S. railroad industry after deregulation in 1980. And who asked for that action?

One more fleeting thought, elicited by a shipper commenting on the P3: “Think of it,” the shipper said, “you can ship with MSC and get Maersk service.” That may or may not be quite right, but what about those who ship with Maersk and get the MSC service? So there are two sides to every coin. How it looks depends on whom you work for.   

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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