An epic performance unfolds

An epic performance unfolds

The stage is set and the lights are dimming. For the audience, a once-in-a-lifetime performance is about to begin. A comedy it's not.

2009 draws back the curtain on a story line that has barely begun to unfold. Setting up the dramatic tension is the glaring disparity between the conditions that container shipping lines face and the impact that they and their customers have actually experienced. Conditions are arguably as bad as they've ever been, but the impact to date hasn't been truly earth-shaking. Some ships laid up, a string of disappointing earnings, softening rates, some downgraded debt and a few shifting alliances are big developments but still fall short of a proportional response to probably the greatest excess of supply over demand that the industry has ever faced.

The real onslaught, in other words, has yet to be felt. As Ron Widdows, chief executive of NOL Group, said in his Review and Outlook essay to be published on Jan. 12, "There appear to be fundamental structural changes at work that will make the future look very different than the last decade."

A lifeline thrown to the industry in the form of a recovery might head off the fallout, but this looks unlikely before 2010, and it would be a tall order for the weakest players to hold out that long. Economic conditions worsened noticeably in October and November, and economists emphasize "downside risks" to forecasts that otherwise anticipate a recovery beginning later this year. In one example, for the sixth time in seven months, Morgan Stanley on Dec. 19 cut its global GDP growth outlook for 2009 to 0.9 percent from 1.7 percent in November, anticipating that when a recovery does arrive in 2010, "it is likely to be moderate, despite unprecedented global policy stimulus," and, in addition, "downside risks persist as a global credit crunch and falling asset prices ripple through the economy."

It seems unlikely that the industry will be able to survive this downturn without structural change, meaning that a burst of consolidation may be approaching. Anyone shipping containerized cargo ought to shudder at the thought. Efforts by the carriers last year to align supply with flat or falling demand, which appeared promising early in 2008 on the trans-Pacific, collapsed during the fall as the remnants of a barely noticeable peak season dwindled away.

To set a tone for rate increases this spring, the lines in the Transpacific Stabilization Agreement were forced in mid-December to acknowledge draconian rate-cutting within their ranks, a rare display of self-criticism at the "shortsighted and regrettable" carnage wrought on what for most of last year had been an impressively stable rate structure in the eastbound trade.

In the aftermath of that debacle and the collapse of Asia-Europe rates earlier in the year, it's difficult to see the industry regrouping this year by somehow methodically withdrawing tonnage from major trades in such a way that a measure of equilibrium is preserved.

Assuming this isn't accomplished, not just in what is certain to be a horrific first quarter of this year when volumes seasonally bottom out, but for potentially the much longer period when overcapacity is likely to be present, a structural readjustment must be the natural result. Noting that "unlike down cycles of the past -- some will not survive," Widdows observed that due to the still enormous overhang of new capacity on order, the industry's period of adjustment is likely to outlast the recession. The order book still exceeds 50 percent of the current fleet -- some 60 ships in excess of 8,000 TEUs are set to be delivered over the next two years -- a reality that can't be undone through order cancellations.

There is only one structural change that really matters in the end: consolidation. The problem is that there hasn't been a major carrier merger in the past 15 years that has been carried out without widespread annoyance and dislocation for customers. And all of those mergers were supposedly well planned out, with public assurances from the senior executives involved that all would go as planned. Now just imagine if a major line were suddenly to cease operations or be forced into a shotgun merger. The impact on customers and, by extension, on trade in affected markets would be catastrophic.

Sit back. The performance is about to begin.

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