The first half was a crackling good start to the year, so why all the worry?
Container shipping volumes and profits rebounded — first half box handling increased 15, 20 and 19 percent, respectively, at the ports of Los Angeles, Long Beach and Charleston. The resulting capacity shortages and skyrocketing rates triggered huge swings from loss to profit at container lines.
As Neptune Orient Lines’ Ron Widdows somewhat triumphantly commented on Aug. 6 in announcing a $100 million second quarter net profit versus a $146 million loss a year earlier (and a 53 percent increase in revenue), “The result for this latest quarter reflects significant progress as we turn around our performance from the economic downturn of 2009.”
And the market is holding. Whatever doom-and-gloom sentiment may exist, it hasn’t hit the container markets yet. Drewry Shipping Consultants’ Container Rate Benchmark for the trans-Pacific spot market soared 225 percent over the last year and backed off only imperceptibly in the last week after climbing steadily since March. It got a further boost in recent weeks from carriers’ apparent success in implementing a peak-season surcharge on import containers.
Although some large beneficial cargo owners told me last week they aren’t experiencing container shortages, others believe the widely reported equipment shortages are a reality for many shippers — so much so that artificial support is being provided to rate levels even as the tight vessel capacity experienced since last December begins to ease.
“In the traditional carrier business, once supply and demand come back into balance and if there was sufficient equipment, you would start to see rates soften,” said Ed Sands, former logistics director for Williams Sonoma and Urban Outfitters and now with the procurement outsourcing firm ICG Commerce. “But now you have supply and demand back in balance and you are short of equipment, so the lack of equipment is maintaining that pricing leverage for the carriers, which is completely different from years past.”
(He said, and others agreed, that the container shortage is spilling over into the U.S. domestic arena, where intermodal providers can’t get enough new domestic containers from manufacturers in China and thus don’t have enough pre-positioned equipment in California for the peak season.)
And many believe carriers’ near-death experience in 2009 will prevent or soften any rate plunge that typically would be the natural consequence of excess capacity. “There is a discipline out there that is unprecedented,” Sands said.
So, why the worry? With all this good news, you would think there would be more optimism and less brooding. But there isn’t much celebrating, at least that I can find. Instead, even the successes are sloughed off.
The first half volume growth? Artificial and unsustainable. The growth was the result of inventory restocking and tactical decisions to ship early, not underlying demand growth, and possibly based on overoptimistic forecasts by retailers viewing the economy from the more sanguine vantage point of early 2010, the thinking goes. Retailers, according to the prevailing view, see an environment beset by rising unemployment and the prospects of a holiday season blighted by markdowns and falling margins.
C.C. Tung, CEO of Orient Overseas Container Line, alluded to the pessimism in his company’s Aug. 5 earnings release: “While the strengthened demand experienced in the first half of the year has seen a welcome return to profitability for the industry, some caution is warranted to the extent that the demand has been driven by inventory level changes and is not necessarily indicative of actual underlying consumer demand during the period.”
One large beneficial cargo owner who ships more than 80,000 FEUs a year described a debate within his organization between those concerned about continuing box and capacity shortages and others who believe that, come the fall, capacity will no longer be an issue: “By September and October, there is going to be a lot of capacity.”
The carriers are reflecting this uncertain outlook in their public statements, acknowledging that the robust conditions in the first half may not continue.
On Aug. 3, Hanjin said it is “concerned that the uncertainty will remain in the market due to the scheduled delivery of mega-sized vessels.”
Tung of OOCL added, “Despite the positive first half environment, the likely strength of consumer demand in the second half of the year remains unclear and freight rates continue to be fragile with significant newbuild capacity still to be absorbed before year-end.”
This conversation shifts very quickly from the industry issues and into the health of the broader economy. As recent news reports in the Wall Street Journal and elsewhere have indicated, there is disagreement among economists as to where the U.S. and global economies are headed.
But there is little disagreement as to the negative direction suggested by recent data, including the most recent jobs report.