Last week’s Journal of Commerce cover story (“Ocean Carriers’ New Pricing Power”) made an observation that hasn’t been lost on many this year: Despite weak fundamentals, container lines have managed to increase freight rates significantly. With capacity growing faster than trade, this isn’t the outcome that expectations or history would predict.
To the contrary, it’s accepted among shippers, forwarders, analysts and even carriers themselves that rates fluctuate as commodity prices have long done, rising and falling fluidly based on changes in supply and demand.
The idea that carriers, through their own actions, could intervene and disrupt this paradigm seems ludicrous, such is the depth of distrust among the carriers, the lack of a collective culture of promoting rate stability, and the fear of being rendered irrelevant through loss of market share by not matching or beating lower rates offered by competitors.
The farfetched notion that carriers could put stability over distrust is at the root of its dysfunction as an industry. Many an observer has been left looking foolish for predicting, based on periodic rate upturns, that somehow carriers were getting their priorities straight. Nevertheless, however unlikely that anything being seen this year represents such a paradigm shift, the current unusual scenario begs an explanation.
The simple explanation is hardly that carriers finally agree with shippers and that stability is a good thing. Rather, it’s that they got scared: An estimated $5 billion in losses sustained by the industry in 2011 pushed some larger carriers uncomfortably close to insolvency. And, even if insolvency wasn’t in the cards, embarrassing, potentially career-ending results were. If that isn’t enough to strengthen one’s resolve, what is?
As Alphaliner’s Hua Joo Tan suggests, such a scenario would result in changes in carrier behavior, but only temporarily. “The rate increases seen this year are unprecedented in my experience, with utilization levels below 90 percent,” he said in reflecting on 20 years of industry perspective. “In my view, carriers are only able to maintain pricing discipline when there are space shortages or, as was the case early this year, when they are bleeding cash. Now that carriers are no longer bleeding cash, it will become increasingly difficult to maintain discipline, especially if utilization levels remain weak.”
Rates have dipped recently. Shanghai-to-North Europe prices have dropped 11 percent since late June, and trans-Pacific West Coast rates have dropped 7 percent during the same period, according to the SCFI index as reported by Clarkson’s.
Some observers, including Sea-Intel, attribute the dip to lower bunker fuel surcharges. “Part of the recent rate decline is purely a reflection of lower oil prices, and not of the overall market health,” the research firm’s Lars Jensen wrote last week.
But analysts believe the carriers will return to profitability during the second half. In essence, they’re saying that, despite weak fundamentals, carriers won’t give back the gains they achieved this year. Following a string of strident statements from Maersk Line and other carriers that profits must be achieved, and that additional market share won’t be sought, it does seem carriers have at least temporarily summoned the necessary discipline.
It’s not so much a “truce” among carriers, which implies collusion, but rather carriers individually concluding that losses can’t continue under any circumstances. “The fundamentals recently are not very supportive, especially with the situation in Europe,” said Johnson Leung, a Hong-Kong-based shipping analyst with Jefferies. “I don’t know about a truce, but I know that they can all see that they need to make some money. Even if a liner company has no survival issue since many of them have, or seem to have, sovereign backing, the management could have a survival issue with their jobs.
“The only way to make some money is to stick to profitable freight rates and let go of volume that could not pay,” he said. “It seems to me that the liners have been doing that so far this year.”
Carriers will need to summon every bit of discipline they are capable of to withstand the onslaught of capacity coming on line over the next year. “A greater concern (versus 2012 deliveries) is the outlook for deliveries in 2013,” Macquarie analyst Janet Lewis wrote in a July report. “To put it in even more stark terms, Alphaliner highlights that over 2.4 (million) TEUs will be delivered from July 2012 through the end of 2013, equal to 15 percent of the current fleet. This could create sufficient excess capacity to push rates lower again without meaningful capacity management by the global operators.”
That’s where the proof will be: If carriers are indeed serious about staying in the black, they will lay up capacity. It’s a big step not to deploy an expensive asset that otherwise could be earning you revenue, but it’s the ultimate show of resolve.