Dead in the Water

Dead in the Water

Every time the future of the struggling container lines has come up in interviews in recent months, the reaction has been the same: Despite the disastrous confluence of the global recession striking at the exact moment of historically high ship deliveries, the idea was that all major carriers would make it through and the industry would look more or less the same when growth and profitability eventually resume.

As counterintuitive as that may sound given the intensity and duration of the recession, how can anyone say for sure that one or more large carriers will not go bust, given the lack of transparency and state agendas that still exist in the industry?

The truth is, it can’t be said for certain; even the most plugged-in analysts, not to mention major customers, admit they are largely ignorant of what is truly happening, oblivious to how close or how far away any individual line may be from running out of cash. It’s nerve-wracking to think that a carrier handling millions of dollars of your merchandise may be inching closer to bankruptcy and you’ll never know it until its ships and cargo are suddenly idled.

But as time passes and as recovery recedes on the horizon like a mirage, it becomes harder to believe that nothing will change.
Signs of trouble are so pervasive that even an industry as resistant to change as this one may be powerless to prevent structural change.

Malcom McLean’s words from a 1982 speech — “the entire industry depends on survival from proper pricing” — are no less true today than they were then, when rate wars were battering his United States Lines.

Yet “proper pricing” for many in the industry is a cruel joke. The carriers as an industry have never demonstrated the ability to get out of a cash flow and market share mindset in pricing decisions, and it is difficult to see anything happening differently now. Rates on the major east-west trades are in the tank — Drewry says all-in rates on the east-west trades will drop 29 percent this year — and there is little evidence efforts by carriers in recent weeks to implement rate increases will stick.

When there is excess capacity, as there still is despite layups, rates will inevitably weaken regardless of what individual carriers say about their intention to hold the line on rates.

But the losses that such low rates produce can’t continue forever — and that is really the point. The red ink now being posted by carriers, and that will continue for at least the next several quarters until supply and demand come back into balance, can’t possibly result in simply an indefinite perpetuation of the status quo.

When rating agencies downgrade debt and predict shortfalls of cash, they may be right. The most distant year I have heard mentioned for supply and demand to come back into balance is 2015. At some point, a major carrier will no longer be able to continue operating and will be absorbed or forced into liquidation.

“Surely, the fundamental premise of any company, whatever sector you are in, is to be profitable. How can you operate these services on a long-term basis if you are not making money?” said Neil Dekker, a Drewry container shipping analyst and editor of its Container Forecaster.

The conclusion is simple, he said in a release last week. They can’t.

“The basic make-up of the industry will change as companies either go bust, amalgamate or shrink, shedding assets and personnel in the process,” he said. “Our analysis shows that the container sector (in 2009) is looking at a $20 billion black hole. So we can expect more casualties.”

As our former colleague Janet Porter wrote last week in Lloyd’s List, whatever peak season comes this summer will offer carriers their best opportunity until next year to implement rate increases.
“Unless freight rates can also be lifted, bankruptcies will begin very soon,” she wrote.

What happens if there is a shakeout? The most immediate concern is for the cargo. At the moment of bankruptcy, a carrier is in disarray and will struggle to deliver cargo. Bankruptcies such as U.S. Lines in 1986 and many others since resulted in some cargo being delayed for weeks.

That is the short-term consequence. Longer term, would fewer global carriers result in a restructuring, such that a more concentrated industry would exercise greater control over rates and ultimately more stability?

The prospect of a concentrated industry has been dangled at shippers periodically as the ultimate price to be paid for years of receiving the benefit of below-cost pricing. But some dispute this future. As the trans-Pacific witnessed in the late 1990s when volumes were brisk, new players will enter the market as long as there are ships for charter and terminals willing to unload their containers.

If ever there were a time to pay close attention, it’s right now.

Peter Tirschwell is senior adviser of The Journal of Commerce. He can be contacted at 973-848-7158, or at ptirschwell@joc.com.