Under Water

How long can you hold your breath? This question has been running through my mind for several weeks as global economic news grew worse (although the stock market has shown a recent spark).

With few exceptions, this month’s Trans-Pacific Maritime Conference in Los Angeles did little to lighten the doom and gloom. It was nice to be with friends and colleagues, however, and away from home and worrying alone. The old saying about “misery loving company” is apparently true.

The malaise has spread to all industry sectors, to nearly every trade lane and certainly all the east-west trades. Amid reports of vessel layups, canceled orders for ships and products, and forecasts — both wise and wild — of when the turnaround might begin, there has been little talk of what may be a much more worrisome element of this crisis.

We should pay more attention to ocean freight rate erosion across the major trade lanes. With Ron Widdows, CEO of Neptune Orient Lines and one of the industry’s most respected executives, predicting a continuation of rates declining below current sorry levels, the magnitude of this problem can’t be overstated.

Ignoring for the moment the reality of confidential service contracts and how the terms of these deals affect net freight levels, the consensus seems to be that basic freight rates from Asia base ports to U.S. West Coast ports have been in the $1,000- to $1,300-per-FEU range for the past few months.
Considering a long-standing pattern of freight rates in the $1,300 to $1,700 range in recent years, this is bad, but probably tolerable — barely — by the carriers, at least for a while.

The more worrisome issue is the sense that rates have not hit bottom and probably won’t until they settle around $600 to $800 in the next few months. This would clearly be intolerable for the carriers, even for a short period — and even with the Transpacific Stabilization’s Agreement’s move this month to expire spot rates.

But what can ocean carriers do? Shippers, feeling the pinch of declining business and fighting to remain competitive in their own markets, have to cut costs. Vulnerable ocean carriers are easy targets. In a way, carriers have only themselves to blame for this. In essence, they have painted bulls-eyes on their backs for years through overbuilding campaigns and bids to buy market share when entering new trade lanes.

In their own way, shippers have painted themselves into the corner of a rate-focused methodology and habits that will be difficult to break. How do you explain to your senior management that your competition has negotiated better rates than you, and thus has lower landed costs and more competitive retail prices? Or should you be seen as soft on the carriers when everyone knows they’re wounded and you’d better get your share when the gettin’ is good?

But this feels different. The situation we’re in feels like a tipping point, and for someone like me who avoids roller coasters, the thought of falling off this cliff is very uncomfortable.

When carriers take the unprecedented step of going around the tip of southern Africa to avoid Suez Canal tolls — or similarly in the Western Hemisphere to avoid the Panama Canal; when hundreds of expensive capital assets (ships and boxes) are laid up — more than 1.4 million TEUs worth at last count; and more, something is very wrong.

Pay close attention, my friends: Ill winds are blowing, and I can’t hold my breath for all that long. How about you? How long can you stay under water?

Barry Horowitz is general manager of container marketing at the Port of Portland, Ore. He can be contacted at 503-944-7426, or at barry.horowitz@portofportland.com.

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