A Widening Gulf

In the month since the TPM Conference, I’ve had a chance to process what came out of the sessions and in private conversations, and here’s one of my main takeaways: Although carriers and cargo interests want to think they’re getting closer together in thought and deed, they aren’t, and the split may be getting wider.

From the conversations at TPM and from what we read in various industry publications, the carriers are focusing on costs. With fuel accounting for more than 50 percent of their operating expenses, slow-steaming and super-slow-steaming are apparently here to stay. Mega-ships with a cheaper cost per slot to build and to operate are flooding the markets. Alliances allowing carriers to reach more markets with less capital and to share expenses with others are spreading and becoming larger and broader in scope.

And it’s all occurring because the carriers recognize one inevitable fact: Rates won’t be able to increase and be maintained for any period of time, so carriers have to survive by reducing costs.

That should sound pretty good to cargo interests — keeping costs low so rates can be kept low — but not so fast. Slow-steaming creates havoc with supply chain planning, inventory levels and production planning, all adding costs. Mega-ships capable of carrying 10,000 to 18,000 20-foot-equivalent container units take days to unload, not hours, and, of course, your containers will be unloaded on day two or three — well, someone’s has to.

And alliances, although cost-beneficial, mean a shipper’s freight sometimes will move on the vessel of a carrier it has no relationship with, possibly going to a terminal it wouldn’t otherwise want to use.

From the carriers’ perspective, if they could raise rates to a level that covered their costs and offered an 18 percent return on investment, business would be wonderful. From shippers’ perspective, give them a daily service with one-day transit time and bargain-basement rates, and all the equipment and vessel space they need, and business would be wonderful.

The world isn’t like that, though, and never will be. So it’s becoming more obvious, to me at least, that the carriers recognize a set of realities that don’t coincide with shipper requirements. The cargo interests must adjust and adapt to the new realities, for now at least. Things may change in time as the global economic environment changes, assuming that change comes in the form of a much healthier and robust economy worldwide. But who knows when that might be?

In the interim, we are where we are. Looking at the carriers’ 2012 financial reports to date, there are no real big winners with earnings that resemble what investors would expect for an industry with such high capital requirements. And there are several losers, with some carriers reacting by scratching capital expenditures on vessels or terminals. Are we getting to the point where consolidation is coming, in one form or another?

It should be obvious that those who have cost advantages are in position not only to survive but also to flourish and register profits that resemble a reasonable return on a huge investment, when a positive swing of $100 per TEU will produce a significant improvement to the bottom line.

But how do those not in that position — low cost at high volumes — survive? Without being propped up financially from somewhere, they can’t. A harsh reality may be facing a few in the not-too-distant future.

Consolidation may be the answer for some. Although the  last few attempts produced questionable results, what’s the alternative? Just pulling the plug? The assets remain for others to pick up and use, likely at favorable costs. But until overall economic conditions improve, what’s to be gained? 2013 may be a year that sets the direction of yet more new realities.     

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 atmrgtf4811@mindspring.com. The views expressed here are his own and do not necessarily reflect those of OWL.

 

 

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