As the 2014 TPM Conference approaches, the rumblings of change in the container shipping world are growing louder. It shouldn’t be surprising. How long can an industry that has averaged a 1.7 percent profit margin over the past 15 years, according to Seabury, not be ready to break out into a new business model? But people have been saying that for years. The difference is that now things may actually be starting to happen.
If regulators in the U.S., Europe and China choose not to block the proposed P3 Network of Maersk Line, Mediterranean Shipping Co. and CMA CGM, as seems likely from what we’ve been hearing, the industry will lurch toward a different structure. What a restructuring of the industry around mega-alliances, which also include the G6 and the possibility of an Evergreen-CKYH linkup, will mean for pricing and profitability is unclear.
But what does seem clear is that the mega-alliance structure will offer no immediate respite from rate wars and extreme pricing volatility. With container shipping demand in a long-term slowdown, and no immediate respite from overcapacity, there is certainly no immediate path to higher profitability for the carriers.
The largest carriers, however, are taking one step that will strengthen their hand: In reducing costs by using only the largest ships, those carriers are tightening the noose ever so gently on weaker lines that are finding it harder to engage in a war over who can build and deploy the largest ships with the lowest unit costs. This is where the action is.
With that change in the air as a backdrop, we’ll gather in Long Beach in just over a month for the 14th Annual TPM Conference, which will take place on March 2-5. For the first time, TPM’s opening keynote speaker will not be the CEO of a container line. Instead, it will be a 3PL, in this case legendary FedEx founder Fred Smith.
Smith’s FedEx Trade Networks ocean forwarder is growing rapidly and helping the company diversify from its traditional focus on express air freight, which has experienced weakness as shippers of former air freight-only shipments look for more economical ocean options.
His presence also underscores how logistics and container shipping are moving in different directions. Container carriers have largely found increasingly little synergy between their logistics and container businesses.
Damco as a business unit within A.P. Moller-Maersk, for example, is now in a different vertical from Maersk Line and no longer bears the Maersk name (Maersk Logistics) as it once did. The same goes for NYK Logistics, which is now Yusen Logistics.
For the container business, it’s about big ships, large volumes and effective alliances. Few opportunities exist today for premium pricing based on service. For 3PLs, it’s about technology, global reach and the ability to offer a menu of logistics services. Those are two almost entirely different businesses today.
Other signs of change are also afoot as we look toward Long Beach. U.S. labor offers a big one. Long-term trends in labor will make their mark on this year’s negotiations between the Pacific Maritime Association and the International Longshore and Warehouse Union, a topic we will cover extensively at TPM. The biggest trend is growing competition among unions for high-paying blue collar work.
As we saw in the protracted labor dispute at Portland, Ore., between ILWU and electrical workers, which drove per-hour crane productivity into the low 20s and led Hanjin Shipping to announce plans to withdraw service at the port, this can be explosive. There are 30 West Coast terminals identified in the current West Coast longshore labor agreement where there is a potential conflict between the ILWU and other unionized workers.
This, along with other issues, such as who will have to pay $150 million a year in incremental health care costs imposed by Obamacare, could make negotiations messy, with collateral damage in the form of cargo delays on the docks.
And change is afoot elsewhere. As the JOC reported recently, Chinese exports in higher-end but typically smaller items such as consumer electronics are growing more rapidly than lower-end, bulkier goods such as footwear, where skyrocketing costs of manufacturing are driving production to Vietnam, Indonesia and other South Asian countries.
In a recent report, Barclays predicted this would impact container flows from China, creating more growth to the south. As that happens, the Suez route — already growing because of the abundance of post-Panamax capacity in need of cargo — could seal a dominant position in Asia-North America ocean trade well before an expanded Panama Canal becomes reality. That discussion is also on the agenda for Long Beach.