When carriers and shippers negotiate shipping contracts, they bring briefcases full of estimates of vessel capacity and demand. Carriers wield forecasts that capacity will be tight and the demand for it high, and argue that rates should go up. Shippers cite figures that show the opposite, and argue that rates should stay flat or go down. How accurate are these estimates? Not very, says a new study by Citigroup, which calls the shipping industry a "graveyard of forecasts," with both an upside and a downside that are continuously underestimated by analysts, consultants and companies alike.
On the demand side, the study said, the forecasts can be way off because shippers' demand for outbound capacity from Asia can change so quickly during a contract period. On the supply side, the carriers often underestimate the amount of available vessel capacity because they don't account for gains in terminal efficiency and increased vessel speeds.
"There's 25 to 50 percent volatility within a six-month period in both the Asia-Europe and the trans-Pacific (demand) forecasts this year," said Charles de Trenck, head of Citigroup transport research in Hong Kong, who wrote the study. "We started out at the end of last year with a forecast of 10 to 12 percent volume growth on the trans-Pacific, and we're running 4 to 5 percent right now. Maybe we'll spike up a little bit in July with China's reduction in VAT (value-added tax) rebates, but the run rate is still decelerating. The best case is that we're going to be in the 6 percent range."
Initial forecasts of the amount of available capacity during a given shipping season can be misleading, de Trenck said. Capacity can be overestimated because it is often calculated on the nominal capacity of the new container ships being delivered, which does not account for unusable space. "We think the amount of effective TEU capacity in non-Maersk vessels needs to be reduced by 7 to 10 percent," de Trenck said. He said other drags on effective capacity can be port congestion in the U.S and Europe, although this is not occurring in U.S. ports this year.
But available capacity is more frequently underestimated, in de Trenck's judgment. "The main reason is that efficiency gains have been and continue to be tremendous," he said. "Container vessel turns can be underestimated, and so can the capacity added to a service as a result of additional port calls." In addition, he said, the average speed of the entire container fleet has increased by one knot to 20 knots, or about 5 percent since 2000, and average stacktrain speeds in the U.S. have increased in the last two years since U.S. rail providers started charging more for service. "The net result of comparing over- and undercalculations falls in favor of capacity having been undercalculated."
De Trenck is critical of carrier reports about different container trades because he said the liner companies "control the airwaves and blow a lot of hype." He said many Asia-U.S. trade observers fall into a trap of "listening to a one-sided account from the shipping lines." At the same time, carriers' customers ignore much of the noise and plot their own course. For example, he said, "In the trans-Pacific, there was no way that the growth rate was going to be 10 to 12 percent this year. Maybe the upside was 8 percent demand growth." Liner carriers "were misrepresenting the story to make it look good."
The Citigroup analyst said the problem with "misrepresented" forecasts is that shippers and carriers must waste so much time circling each other in their negotiations before they can get down to figures they can agree on.
"The difference between a truthful discussion and throwing out a lot of propaganda is that you've got to argue against the propaganda before you get to the real debate," de Trenck said. The Citigroup study was aimed at laying the groundwork for "a truthful discussion in various trades where we can."
There is tremendous volatility in the different forecasts because there is no one organization that collects and analyzes all the data that's available. "The purpose of this exercise is to get a global body that properly tracks this stuff. We have an IATA for airlines. We need a body that can track this," de Trenck said.
He said the only movement in this direction is the new openness at the Transpacific Stabilization Agreement, which is trying to have a more open dialogue between its carrier members and its customers. He called for creating a similar dialogue on a global basis. "The first thing to do is to get people from the Far Eastern Freight Conference and the TSA together and contribute to setting up a body that can track the stuff and get to a revenue per TEU-mile of available capacity."
With data on capacity supply and demand collected and analyzed by an independent global body, shippers and carriers would have a starting point for their contract negotiations, de Trenck said. The Citigroup study was aimed at laying the groundwork for "a truthful discussion in various trades where we can," he said.
But before such a dialogue can begin, improvement is needed in the quality of data on global supply and demand. "From a capacity point of view, you should be linking the data on the different trades, but a lot of the numbers don't work very well," de Trenck said.
In its study, Citigroup used figures supplied by Drewry Shipping Consultants, Clarkson, Dynamar and PIERS Global Intelligence Solutions, a sister company of The Journal of Commerce. "Based on their estimates, we come up with 120 (million) to 130 million TEUs in global container volumes, but you've got to figure out a way of stripping out the double counting, transshipments and empties," de Trenck said. "It's not just Asia-Europe and the trans-Pacific, where we've got good data, but it's the 70 (million) to 80 million TEUs on everything else - north-south, intra-Asia, tramps and regional trades."
He said these trades are not being properly analyzed. "We fob off the other 80 million TEUs by saying 40 million is intra-Asia and the other 40 million is north-south and a few regional trades. We need to go into those numbers and analyze them. How do we find the real numbers?"
Liner companies often point out that a lot of their capacity is being absorbed by the rapid growth of these other trades. But the Citigroup analyst said the volumes being shipped in these trades are often double-counted, which makes them appear much stronger than they actually are. He said the container volumes in the intra-Asia trades, which in their expanded form include the Middle East, India and Australasia, are estimated by the Intra-Asia Discussion Agreement at 42 million TEUs. But he said the figures include transshipments to Europe and the U.S., domestic moves in China, the shipment of empty containers and an indeterminate amount of double counting. If these container moves are stripped out of the 42 million-TEU figure, the net volume could be as low as 11 million TEUs.
"We still have a problem of understanding the growth because a lot of capacity is on the non-long-haul trades, where it is not on scheduled services," de Trenck said. "We don't know how busy they are, and we don't know what the utilization levels are. That's why container shipping forecasting is like black magic."
Peter T. Leach can be contacted at email@example.com.
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