Testing Ocean Carrier Resolve

I’d love to be able to say the JOC TPM Asia Conference in Shenzhen brought clarity to the container shipping environment. Although it did in certain ways, in others it was difficult to avoid the conclusion that it’s becoming tougher to weigh the relative impact of the major forces coming to bear on pricing in the east-west trade lanes.

On the one hand, supply and demand is fundamentally unstable, with no end in sight to structural overcapacity and growing price volatility. On the other, carriers are getting tougher, taking a noticeably harder line in a drive to become more profitable by relentlessly seeking rate increases, expanding slow-steaming, and idling tonnage. The clash of these opposing forces makes this an exceedingly complex environment to size up, let alone operate in.

It was clear from presentations in Shenzhen that the industry would face extreme challenges next year. On the face of it, carriers are heading for rough seas. The 4 to 6 percent growth forecast for global demand is well below the 9 percent forecast increase in capacity net of scrapping, Alphaliner analyst Hua Joo Tan said. This excess capacity must be added to a stubborn, semi-permanent overhang of excess capacity that has lingered since 2008.

With Asia-Europe trade likely to contract as much as 4 percent this year and with no signs of a European recovery, a 4 to 6 percent increase in demand next year may be optimistic. Whether the carriers can effectively combat such headwinds is the key question facing the industry as 2012 comes to a close.

“This excess capacity is something the industry has to get itself out of,” Tan told the conference. “There is very little in terms of options for the carriers at this point. There’s a lot of talk about vessel idling, slow-steaming, charter redeliveries and scrapping, but unfortunately these measures are short term and don’t address the structural oversupply the industry is facing.”

The carriers’ need to reduce unit costs in the face of rising fuel and other operating costs, he added, is leading to unneeded investment in new ships that will prolong overcapacity. “The industry doesn’t need new ships at this point, but there is a lot of pressure on carriers to continue the arms race, to lower unit costs, with eco designs and so forth, and all of this is adding to new capacity when the market doesn’t need it,” Tan said.

Making matters worse for carriers, and their customers, is volatility, which Tan said is at an unprecedented level. The run-up in rates last spring and the decline in Asia-Europe rates through the summer and fall (despite last week’s uptick) is a case in point. This year “has been the most volatile in the industry’s history as far as freight rates are concerned,” he said. “In the first five months, we saw the sharpest increase in rates the industry has ever seen, and afterward we saw a sharp drop, arguably the sharpest one ever. What it means is the shipping cycle is becoming very compressed.”

The large supply of idle ships that can be reactivated on short notice will only heighten rate volatility, he said.

The carriers understand all of this, but are taking a longer-term view, based on an assessment that the fundamentals driving industry growth have changed. Major contributors to growth, including the great outsourcing wave, China’s entry into the World Trade Organization and U.S. consumer spending based on low-interest debt prior to the financial crisis, are one-time only and have all run their course, with the result that the industry will see lower growth rates in the future.

“For the longest time, container growth was a two-times multiple of GDP growth, but going forward we believe the multiple will be lower, say 1.5, 1.4 or perhaps as low as 1.1,” NOL CEO Ng Yat Chung told TPM Asia. “The great boom in container shipping (was made up of) one-time factors that will never come back.”

He pointed to ship financing as an example of another fundamental change that will limit vessel purchasing. But it’s an attitude and behavioral change that he alluded to that may be most significant in the long term. “I expect frankly that carriers will be much more focused on efficiency, getting their cost position right rather than being focused on market share or growth,” he said.

Lucas Vos, chief commercial officer at Maersk Line, agrees. “Profitability is the name of the game at Maersk,” he said. “Maybe this was not as clearly stated as it is this time around. We have been growing in the past more than the market; now we want to grow with the market.”

What happens to the rates in the coming slack season will be the first test of carriers’ newfound resolve.

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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