Those of us who regularly read shipping industry reports from around the world must endure a mix of emotions when reading the news of the day. Some days, we smile. Others, we may shed a tear. And then there the days of bewilderment.
And that was my reaction when reading on a late-summer day in August that truckers had shut down the Port of Oakland over alleged issues with the port and terminal operators. I can certainly understand the frustration at times with slow turnaround times at terminals, but is shutting down the port a solution to that? Where are those with enough common sense to work out the issues without it coming to that?
On the brighter side, A.P. Moller-Maersk investors are said to be pleased with the Danish conglomerate’s second quarter results, according to Lloyd’s List. I’m thinking the investors represent a rather small contingent outside of the family trust who own the majority of the stock, which was trading at $8,995 a share, up nearly $200, a day after the company released its financial results.
But the second quarter results could be confusing to some: Container freight rates were down 13 percent year-over-year, volumes were up 2 percent and costs were 12 percent lower. Yet net profit increased a whopping 93 percent, from $227 million in the second quarter of 2012 to $439 million this year. Math is funny sometimes, but in this case it’s more interesting than funny.
Most of Maersk’s competitors, meanwhile, are reporting losses, with some surprising experts and pundits. It’s a very similar pattern to 2012 — a mixed bag of profits and losses, but fewer with profits so far this year.
The difference between those making money and those losing it, as I’ve stated several times in this space over the past two years, is cost. As I’ve also suggested, and as the results demonstrate, maintaining strong rates isn’t easy, especially with today’s market conditions. Double-digit percentage reductions to a price structure will cause problems for any industry, so how does one not only survive but also thrive under those conditions? By focusing on cost reduction and being the low-cost service provider in the industry.
Starting in 2006, with the introduction of the 15,000-TEU Emma-class vessels, Maersk has been on a quest to be not only the largest carrier, but also the lowest-cost provider. Those ships, and the other modern and efficient vessels deployed and now being supplemented with 18,000-TEU vessels that are even more efficient, are the cornerstone of the strategy that gets Maersk to the numbers cited above.
Other carriers followed, and still others are just catching up. Yang Ming in mid-August was reported to have ordered five 14,000-TEU vessels for delivery in 2016, building on an earlier 10-ship order for delivery in 2015. Two things about this stand in stark contrast to Maersk — and other Top 20 carriers, for that matter. First, Yang Ming was late to the party, behind the Emma-class vessels by nine years. Second, when it did finally join the party, it ordered ships that many would say aren’t as cost-effective as the larger versions seen on the water today.
So in comparing the two carriers, one has had a significant cost advantage for an extended period of time, much of which has been through rough financial waters. When the second reacted, it seemed to have been conservative.
That’s not to say Yang Ming is wrong. No one will really know for another five to 10 years which companies made the right decisions. It’s also possible that, because of the trades these ships will be deployed in, over the long run, both are right.
But for now and the next three years or so, those who acted earlier and acted the boldest will reap the greatest benefits. There’s enough evidence to suggest that one public carrier and perhaps one private carrier will outperform the industry this year and through 2015, and not by a small margin. Getting involved early in the game with bigger vessels and other cost-cutting made a significant difference. That’s what the numbers show, so far, at least.
Gary Ferrulli, a 40-year shipping industry veteran, is director ocean product for non-vessel-operating common carrier Ocean World Lines, a subsidiary of Pacer International. Contact him at firstname.lastname@example.org. The views expressed here are his own and do not necessarily reflect those of OWL.