Shipping's Chain Reaction

Just when it appeared that some rate level improvement might be in the offing, especially in the pivotal Asia-Europe trade, recent reports reveal that rates fell again in early July. Rates had been on the upswing, and increases announced to take place on July 1 seemed to be holding.

Always in the hunt for good news, the ever-optimistic ocean carriers had taken a harder line on their July 1 general rate increase, but as has happened so often in recent years, the good news was strongly influenced by very bad news: the sinking of the MOL Comfort seems to have removed enough capacity from the trade to assist the lines in holding onto most of the announced GRI.

On the lookout for a good euphemism, SeaIntel Maritime Research’s Lars Jensen referred to the loss of the MOL Comfort as an “involuntary scrapping.” From where I sit, this bears a strong resemblance to grasping at a straw in a strong wind: involuntary scrapping, indeed — maybe an “involuntary scrapping” surcharge is in our future. Fact is, the average rate in the Asia-Europe trade is 26 percent lower than in July 2012.

All of this bodes ill for carriers and the trade. It’s especially worrisome that the majority of ultra-large container vessels are entering the Asia-Europe trade. Concurrent with the less-than-stellar news about rate levels has been the announcement of the creation of the P3 carrier group. This alliance of Maersk Line, CMA CGM and Mediterranean Shipping Co., the world’s three largest container ship operators, adds a new element to the ocean shipping landscape.

Combined, these three lines command some 37 percent of global container ship capacity. The top six lines — the Big 3, plus Evergreen Line, Cosco and Hapag-Lloyd — control almost half. And the Top 10 — bringing APL, Hanjin Shipping, China Shipping and MOL into the mix — account for almost two-thirds of all container capacity.

Not to overdo it, but most of this capacity as of next spring will be controlled by only two shipping groups: the P3 and the G6, the 15-month-old alliance among APL, Hyundai Merchant Marine, MOL, Hapag-Lloyd, NYK Line and OOCL.

Once upon a time, ocean carriers operated alone, each offering a specific type and level of service. This proved unsustainable because shippers expanded their demands for global service, shipping regulations changed, conferences were eliminated, the size and cost of vessels increased, and operational costs, especially fuel, reached record levels. In a sense, this process bears some resemblance to Sir Isaac Newton’s Third Law: Every reaction has an equal and opposite reaction. 

In this case, the reaction has been the almost total blurring of the lines of difference between any individual ocean carrier and any other ocean carrier. With the majority of capacity operated by an ever-smaller number of lines and an even smaller number of carrier group services, the result has been the increasing commoditization of ocean carrier services. Service differentiation, once a primary selection criterion for shippers, is now virtually invisible as each member of every alliance makes the same service available, regardless of the name of the carrier on the bill of lading.

With service differences gone, carriers have little choice but to compete on price, one clear example of commodity-type pricing. If they all look alike in service, what other tools do carriers have to appeal to customers, except for lower prices? Even this might not be so bad. Carriers, after all, have been fighting the price wars for years.

The killer part of this situation is that customers still haven’t recovered from the Great Recession and shipping volume levels haven’t returned to their pre-crash levels. As a result, the carriers must maintain as much market share as possible to generate cash flow in order to service the debt accumulated through the purchase of their ULCVs. They’re doing this via the problematic route of rate competition. 

All of this is worrisome. In a reduced revenue universe, companies react (there’s that Third Law again) by cutting costs. By building the ever-larger ships, they have reduced per slot costs, probably to levels as low as they’ll ever be. Carriers, however, have little or no control over fuel prices, which continue to be stubbornly high. This almost inevitably results in cutting ever deeper into personnel costs, with the resulting reduction in direct contact with customers.

It’s a nasty spiral that doesn’t augur well for the future. Perhaps the last remaining ray of sunshine is the fundamental reality of the absence of any viable replacement for the need of ocean shipping capacity to move the world’s unquenchable thirst for stuff — unless, of course, the rivers of trade begin to flow backward, which some people believe may be the next Big Thing.

Barry Horowitz is principal of CMS Consulting Services. Contact him at 503-208-2232 or at barryh@cms-cs.com.

 

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