Q: Can you help me sort out the confusion that seems to be coming out in news reports about projections for the trans-Pacific trade? We have a lot of cargo moving in this trade, in both directions, and we’re trying to get a handle on what’s going to happen.
Carrier executives are forecasting significant increases in trans-Pacific rates for this year, on the order of $100 per 20-foot-equivalent unit and $200 per 40-footer. They say it’s a sure thing, that we can count on it.
At the same time, independent analysts say there will be significant overcapacity in the trade, because so many carriers are taking delivery of new vessels. Now, in the past, overcapacity has meant, if anything, lower rates, and certainly not increases. So these forecasts seem to conflict.
This is the time of year when we negotiate annual contracts. What should we be looking for as we go into this?
A: You should, in my opinion, be looking to keep as flexible as you can. It isn’t so much that the forecasts are in conflict as it is that they’re coming from two sharply diverse points of view, and the proof of this pudding is definitely going to be in the eating.
If you have a well-polished crystal ball, you can try to predict the level of demand, not only in this trade but worldwide, because that’s what will ultimately flavor the pudding. Until that materializes and stabilizes, however, things will remain in flux, with carriers pushing hard for higher rates and shippers trying to decide where to push back and where to give.
Yes, lots of new bottoms are coming into service. There’ll be some scrapping of worn-out scows, but the net is going to be a significant plus in terms of capacity. If forecasts are accurate that growth in demand won’t keep up with capacity expansion, that leaves shipowners four choices about what to do with these pretty new vessels:
— Don’t use ’em. No, I’m serious, so quit looking at me like I just grew a second head. Sure, it means taking that new asset and parking it for a while as carriers await better times, but at least they don’t add the operating costs onto their monthly nut for the principal. Of course, suppose you as a carrier park your new vessels, but your competitors don’t? The supplier end of the market benefits, but you lose share. It’s a viable option, but won’t warm the cockles of many carrier executives’ hearts.
— Use ’em, but accept underutilization. An apocryphal tale tells of a businessman who was complaining he was losing a nickel on every unit of product he produced. “But,” he finished proudly, “you should see my volume!” Operating costs are based far more on sailings than on cargo units, so that’s not a cockle-warmer either.
—Use ’em elsewhere. The trans-Pacific trade isn’t the only game in town; if the trans-Atlantic, for example, or some other trade picks up sharply, the capacity can be diverted there. But demand in other trades isn’t expected to head skyward either, so this one’s pretty iffy.
—Use ’em fully by stealing traffic from the next guy. But the way ocean carriers do that is by undercutting that next guy economically. He’s not a store mannequin, so he’s going to retaliate. Presto, price warfare, and rate increases go out the window. Or, of course, there’s always a fifth option: Say very earnest and devout prayers that demand increases a lot more than the forecasts say. That’s basically what those carrier managers who confidently talk about rate increases are doing.
Who knows, maybe they’re right. By everyone’s measure, the U.S. and the world economies are picking up; the disagreement is only over how much and how fast. This is where you have to dip your spoon into that pudding before you know its quality.
The carriers aren’t just blowing smoke about the rate hikes. What they’re doing is some heavy-duty public relations aimed at shippers and their competition. If they can talk shippers into softening up on negotiations, that’s a big plus. If they can talk competitors out of starting what could be a premature and unnecessary price war, that’s another.
That’s because they really need those rate increases. Operating costs have been rising year after year, and rates, driven by the same supply-demand economics that rule today during thin times, haven’t kept pace. Margins are slender, even verging on negative, and those new ships didn’t come cheap.
Still, it’s the real-world market that will ultimately decide.
Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 29455; phone, 843-559-1277; e-mail, BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.