The Art of Boxship Supply and Demand

Asked recently to explain an ocean container market in which freight rates and liner profits have collapsed this year after soaring in 2010, the Asia-based CEO of a Top 20 container line channeled best-selling business management author Tom Peters: “If you’re not confused, you’re not following.”

He drew a picture of a liner business in which its leading actors know there is a broad narrative, but have little idea what the other actors are doing or, in some cases, even who they are — the industrial equivalent of a David Lynch thriller or a Terence Malick abstract. And the finale? Take a stab in the dark, the protagonists certainly are.

Although he wasn’t able to go on the record due to internal policy, the CEO said carriers “had no one to blame but themselves” for the current decapitation of freight rates. While vessel orders placed in 2007 and 2008 were understandable because no one predicted the ensuing global financial crisis, orders since had condemned the industry to overcapacity.

He was equally scathing of the ideas that the reintroduction of liner conferences would help better balance vessel capacity — it hadn’t stopped excess capacity in the past, and isn’t supporting rates now in an environment that allows owners to communicate freely — or that Maersk or any other carrier would deliberately rack up losses to eliminate rivals.

“No one is going to waste money to kill other lines,” the CEO said. “They’re just doing the best they can to fill their ships.”

In the post-conference world, liner executives often had to rely on the same information as everyone else to inform strategic decisions. Or they simply followed whatever the largest lines did, he said.

“We can’t talk to each other, so we speak to customers, we read press reports. The SCFI (Shanghai Containerized Freight Index) is quite good for movements. It’s hard to check little movements upwards in rates unless there is something announced, then people follow.

“The Big 3 — CMA CGM, Maersk and MSC — set the price. Cosco or China Shipping don’t exactly follow, but those three drive the markets. If someone outside puts up rates without the Big 3 then everyone watches what the Big 3 does,” the CEO said.

With so much economic uncertainty, almost anything could happen going forward, and most lines will have little influence on their own market, he said. Volume demand into the U.S. and Europe next year is a mystery, for example. “Will it go up or down? Nobody knows!” he said. “Everything being equal, we anticipate demand growth next year. But there is so much overcapacity. From a revenue perspective most are concerned or pessimistic when people like Maersk say they won’t idle ships.

“If nothing substantial happens, these market conditions will stay the same for two to three years. But if big lines idle ships, rates will go up not by $50, but by $500,” he said.

“Everybody says something has to give because we’re losing such large amounts of money now it defies logic. Even the ones with the biggest ships are losing money because not all their ships are 13,000 TEUs. “But look at 2008-09 — no one went out of business. The fundamentals of this business are difficult to predict. You can look at a few lines who might be up for sale and the KGs are suffering, but you can’t predict who is going to go belly up. And even if someone did, the ships would remain in play!

“Somehow, somewhere it’s not a level playing field,” he said. “There are other interests behind this.”

Unseen forces, confusion and foreboding — never mind Lynch, even Hitchcock would be proud.

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