What ‘zombie’ carriers and steel mills have in common

What ‘zombie’ carriers and steel mills have in common

Shipping and steel have a lot in common. Both are essential industries that never quite seem able to match supply and demand well enough to ensure steady profitability.

Both are highly cyclical and capital-intensive, requiring heavy investments that must be made years in advance, usually on the basis of imperfect forecasts. Once an investment is made in a ship or mill, it stays around for years, adding to capacity and lowering prices.

The oceans are littered with “zombie” carriers that remain afloat despite heavy losses. The same is true for steel, where mills may be idled from time to time but owners are unwilling to pull the plug on an investment they hope someday may turn around.

Shipping and steel intersect in the breakbulk market, where steel is a core commodity for multipurpose vessel operators and ports. When a weak economy or trade sanctions reduce steel shipments, breakbulk carriers and ports are the first to feel it. Shipments of finished steel are affected, and so are movements of ores, coal, and scrap, which fill bulk carriers that compete with multipurpose vessels.

Slowing economic growth has encouraged China’s country’s steelmakers to send excess production to the United States and Europe. To no one’s surprise, this has provoked retaliatory anti-dumping actions by the United States and the European Union.

Low steel prices have contributed to an oversupply of multipurpose vessels and sent rates to unsustainable levels. Rather than scrap ships when steel prices are low, carriers are hanging onto their vessels in the hope the steel market will recover, or that shipping rates will improve.

Despite their similarities, steel and shipping differ somewhat in one important area. Steel is a fungible commodity — if a customer can’t obtain hot-rolled coil from one source, there’s always another source that can provide similar quality. In recent years, it’s been fashionable to describe shipping as a commodity, but it’s doubtful that many of Hanjin Shipping’s customers would endorse that view today.

Hanjin’s collapse underscored that a carrier’s financial stability matters, something many had forgotten since the last wave of container line bankruptcies back in the 1980s.

Project cargo shippers and forwarders are acutely aware of the risks of dealing with carriers that have shaky finances or poor operating practices. Cargo loss, delay, or damage is a setback for any shipper. It’s disastrous for a large, complex module that can’t be replaced quickly enough to keep a billion-dollar project on schedule. Even the lowest freight rate can’t make up for that kind of fiasco.

Hanjin’s bankruptcy has raised many questions. The most intriguing may be: Will it encourage a two-tiered pricing system in which better carriers can charge more for superior service? And if not, why not? 

Contact Joseph Bonney at joseph.bonney@ihsmarkit.com and follow him on Twitter: @josephbonney.

 

Comments

Joe, well done and to your question, how do shippers define "superior service"? and is there value to them for this? A quick review of Matsons role in the Transpacific may be a barometer. They started with one string, expanded to two and then fell back to one. They do charge a premium by providing a faster transit time and a terminal service that is superior - and yet one string. All vessels are under 3000 teus and one is under 2300 teus - so the capacity is really 1150 to 1400 40 ft containers. That's how many boxes shippers are willing to spend extra money on a week. Anyone encouraged by that to become "superior"?

Good questions. The late Supreme Court justice Potter Stewart, defined obscenity this way: "I know it when I see it.." Shippers need something more precise. And you're right, the Matson example probably is a better gauge of the market's willingness to pay for premium service than many container shippers are willing to admit.

Joe, most of the analysis is accurate. What I would add particularly to product differentation (superior service) is changing importance of transit time. I reckon that as long as interest rates are low, principals are willing to tolerate to longer transit time. Basically, the cost of carrying extra inventory in pipe-line is not as significant as it was being like 10 years ago. Besides, most of the carriers ( even the worst ones) now are able to provide quite well tracking info on container level. Considering both of above, I do not think that cargo owners are willing to pay dramatically more for superior service. Please remember "Daily Maersk ".

Both of your points are valid. It'll be interesting to see how many cargo owners are more willing to pay for premium service when higher interest rates make inventory more costly to hold. My guess: very few.

It comes down to what drives their decisions. But, most large corporations have a top down objective setting system that impacts issues like personal bonuses; the CEO sets out a list of 5 to 10 Objectives for the year which is pretty general in nature which is sent to his direct reports; they in turn create theirs to support the CEO's but from the perspective of their accountability. So say you are the VP of Supply Chain, and one of the CEO's Objectives is "reduce costs by no less than 5%". So yours becomes "Reduce supply chain costs by 5%". Your logistics people then have theirs as Delete repeated word logistics costs by a minimum of 5% " etc It isn't just words on a document, it is how they are compensated and when push comes to shove "do I aggressively pursue reductions or do I go after the best transit time?" Guess which wins?? And my the way, the Matson services started when things were relatively well and still didn't fill two strings. One is just fine.

Corrections to above: It comes down to what drives their decisions. But, most large corporations have a top down objective setting system that impacts issues like personal bonuses; the CEO sets out a list of 5 to 10 Objectives for the year which is pretty general in nature which is sent to his direct reports; they in turn create theirs to support the CEO's but from the perspective of their accountability. So say you are the VP of Supply Chain, and one of the CEO's Objectives is "reduce costs by no less than 5%". So yours becomes "Reduce supply chain costs by 5%". Your logistics people then have theirs as "reduce logistics costs by a minimum of 5% " etc It isn't just words on a document, it is how they are compensated and when push comes to shove "do I aggressively pursue reductions or do I go after the best transit time?" Guess which wins?? And by the way, the Matson services started when things were relatively well and still didn't fill two strings. One is just fine.