Happy New Year?

Happy New Year?

A few clients and several business friends have asked for my views on where 2010 is heading, and my stock answer is, “If I knew that, I’d bottle it, sell it and be very active in the buying and selling of publicly traded industry-related stocks.”

My instincts tell me certain markets — intra-Asia and possibly Asia-Europe, for example — will see a nice rebound in volume, with China expected to import 10 percent more goods this year than last.

But when it comes to the Asia-U.S. market, I can’t get past the U.S. unemployment figures and the rise in home foreclosures, two economic indicators that will affect how much we buy in the U.S. this year. The political arena will be favorable, with incumbents doing all they can to stay in office in the midterm elections. But the stimulus program has only increased the number of government jobs and hasn’t jump-started the private sector. So I expect maybe a 3 to 5 percent increase in volume from Asia to the U.S.

Other clues exist about the market’s direction, some obvious — ocean carriers losing $15 billion to $20 billion in 2009 and not having the financial capacity for a repeat performance — and some not so obvious — the rate increases taken by ocean carriers from mid-2009 until now, for example.

Most of that was simple self-preservation, but some was more, at least to me. In early 2009, many non-vessel-operating common carriers looked at the supply-demand ratios that would dominate the markets and correctly concluded many contracts for the remainder of 2009 with their customers, assuming the service providers couldn’t take increases in that environment. When their favorite carriers came knocking in June, July and later asking for increases, the NVOs naturally said, “No, thanks, I like what I have.”

To the surprise of many, the carriers responded, “Well, OK, but when we hit our capacity guarantee to you, you either pay the higher rates or we won’t cover that additional cargo for you.”

I think most initially took this with a grain of salt because history told them they held the right cards in the form of volume on a year-round basis. Yet most of what the carriers said actually happened: When space got tight, they left cargo off the ship. That forced some NVOs to grudgingly accept some form of a price increase just to satisfy customers’ service requirements.

This phenomenon is reflected in NVOs’ financial returns. To be sure, we don’t see them losing billions of dollars, because their business model is flexible enough to allow them to make money even in these unfavorable market conditions. But we could have just seen the carrier industry, driven by self-preservation, start to take a different approach to markets, even if it is just for the next year or two while they struggle to remain viable. Whether they maintain that stance remains a fundamental question facing the industry.

That said, many carriers will struggle to survive again this year. They will try to raise rates and likely will get some empathy from cargo interests. While ships don’t disappear when a carrier goes out of business, in this market I can’t see existing carriers buying up that capacity to any real extent. And while there may be a few newcomers such as The Containership Company, if you are a major shipper, you won’t bet your supply chain reliability on them.

Under those conditions, the entities most greatly affected will be the non-operating ship owners. We’ve already seen daily charter rates fall 60 to 80 percent in some instances, and if trade doesn’t pick up much, even with those low daily rates, the ships will sit idle and not generate revenue.

I expect carriers as an industry to lose billions again this year, but far less than last year. And I expect three or four carriers will merge with others or simply go out of business. Carriers will remain in a cost-control mode by slow steaming, removing capacity and scrapping vessels. More container ships were scrapped last year than in the previous decade, including a 17-year-old 4,300-TEU vessel, a clear indication of the state of the industry.

Service will get a lot more attention in the next round of contract negotiations. In past negotiations and contracts, some cargo interests included issues such as minimum space and equipment guarantees, and maximum transit times.

These service provisions were largely in import trades where tight capacity and equipment shortages occurred during the peak season. But many U.S. exporters have complained about the lack of space and equipment for their exports during the past 18 months, and this is their opportunity to seek guarantees.

So where is 2010 headed? I’d say things will be better than in 2009, but that isn’t saying much. Cross your fingers and hope for better results.

Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. He can be contacted at ferrullig@mindspring.com.