The Quest for Reasonable Liner Pricing

2012’s container shipping rally produced rising freight rates that brought liner operators back to profitability. But with the market at another ebb, liner companies collectively must keep a cool head and resist the temptation to engage in a price war that would jeopardize a sustainable recovery.

Container shipping demand, of course, derives from and depends on global economic development, growth of international trade and changing trade patterns. The global economy is subject to a variety of factors and thus inevitably volatile. The nature of globalization means minor economic changes often translate into worldwide economic turbulence that is difficult to alleviate, hurts world trade and consequently the shipping industry that depends on it.

To cope with the recent economic crises, the U.S. and European Union introduced policies to limit China’s exports. Both, for example, are investigating electronics goods made by Chinese producers Huawei and ZTE. The European Commission last October formally put forth the concept of a “new industrial revolution” in the hope of promoting the industrialization of EU countries to raise the import (duty?) threshold on Chinese automobiles, chemicals, toys, costumes and other products. These measures largely impact Sino-European and Sino-American trades and, by association, container shipping demand on Far East-Europe and Far East-America routes. Liner operators are powerless to change the situation, so must endure the ramifications.

Market pricing, likewise, is subject to both supply and demand. When events beyond their control weaken demand, carriers must depend on the supply side — capacity — to stabilize rates. Unlike demand, however, carriers can control the supply of capacity. In the short run, they’re doing that by slow-steaming their vessels, and laying up and scrapping ships. Long term capacity management depends on a smaller order book and larger-scale scrapping.

The first three quarters of 2008 (prior to the outbreak of the financial crisis) was a period of extreme prosperity for the shipping market. Ship orders that were equivalent to 70 percent of the existing fleet at the time and scrapping that amounted to less than 200,000 tons reflected it. The time it took to fulfill those orders left room for secondhand ship transactions, but the market still faced great uncertainties.

When those ships ordered prior to the economic collapse were delivered three years later, they encountered 2011’s severe slump in demand. The irreversible fleet expansion further affected freight rates.

On the supply side, then, the key to a sustainable industry is accurate judgment of market development and reasonable control of new orders and fleet expansion.

When the market is down, it’s not difficult for liner operators to exercise reasonable control of their fleets. The true test comes when freight rates pick up and some carriers return to profit. Under such circumstances, liner operators tend to diverge on expectations, and profits sometimes lead to unreasonable decision-making. Such a period plays a key role in the market development.

When the dry bulk shipping market picked up after the 1983-84 depression, shipowners from Japan, Greece and Norway began to order new ships. A pricing war, however, delayed the market recovery for five years. Today, the liner market faces similar situation. If the liner companies are rational enough in controlling their fleets, maintain reasonable pricing in cooperation with their customers and provide service quality, an overall recovery of the market is foreseeable. But if they are irrational in the investment of new ships and wage another price war, the situation will darken quickly, the recovery will be delayed, hindering sound and sustainable development of the industry.

The quality of the shipping service depends on a reasonable price. When income lags costs, carriers no longer guarantee punctuality, transit times and ship conditions, and shipper interests are hurt. Reasonable price levels will safeguard a sound shipping operation, provide standardized services for customers, and allow for more port callings, optimized service networks and improved IT support that monitors cargo and operations.

The future development of container shipping calls for continued innovation in techniques and management, which will promote the transformation of the global economy and trade patterns. Container vessels will continue to evolve as bigger, environmentally friendly ships enter the market. In addition, continued innovation will lower transportation costs and improve the efficiency in fleet management and port calls through intensive cooperation among liners.

Li Jing is a professor of international shipping management in the College of Transportation and Logistics at Dalian Maritime University in Dalian, China.

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