First-quarter results offer encouraging news for the container shipping industry. First out of the financial blocks, as usual, was APL, reporting a 32 percent spike in volume year-over-year, and a 12 percent increase in average rates, to just above $2,600 per FEU. That’s certainly good news for an industry still digesting 2009’s financial devastation.
Drewry Shipping consultants in London and executives from Maersk Line, the world’s largest container carrier, issued words of caution, however. Both companies seem to believe the first quarter was an anomaly caused by two conditions: the beefing up of low inventories in key consumption areas and the Asian holidays falling later in February — both logical assumptions.
Drewry and Maersk also seem to think the global economy will grow in 2010, but at far more modest levels than the first quarter.
And, in a not-so-unusual divergence among experts, PIERS Global Intelligence Solutions, a sister company of The Journal of Commerce, just revised its containerized import-export forecasts upward from earlier predictions.
The strong first quarter also helps to explain why carriers were rolling cargo to later sailings this winter. Sure, the rest of the industry almost certainly won’t match APL’s stellar quarterly performance. But let’s assume industrywide growth in volume comes in at about half of what APL did, or 16 percent. How many cargo interests told carriers their first quarter forecasts were in that range? How many marketing departments at the carriers’ corporate headquarters forecast those numbers?
Here’s what I’m getting at: The carriers’ curtailing of capacity was traditional and not unexpected. The first quarter, after all, is always much slower than the fourth quarter, and few, if any, forecast the level of increase that occurred. Had a large contingent of cargo interests told the carriers they expected 15 to 20 percent growth in the first quarter vs. last year’s first quarter, there was plenty of capacity available for carriers to cover it. This is not to say the resulting backlogs were the cargo interests’ fault; they were as surprised by the size of the increase as anyone.
So, going forward in 2010, we already see carriers living up to tradition at this time of year by increasing capacity. The question will be: Did they learn anything from the first quarter, or will they believe it was truly an anomaly?
And on the other side, will cargo interests be more diligent in trying to give more accurate forecasts to the carriers? I stress “accurate” because the tendency may be the same here as when shippers book the same cargo on three to five ships: overstate the anticipated volume and watch the carriers add more capacity than required to ensure coverage.
Speaking of lessons learned, one recent report indicated that, while 2009’s plummeting volumes contributed to carriers’ dismal financial reports, two related industries did relatively well during 2009. Most terminal operators, while not reporting the healthiest of years, nonetheless reported earnings that were 20 to 25 percent of revenue. Not bad for a down year!
It proves that those who invested heavily in this industry a few years back, including the Ontario Teachers’ Pension Plan (which acquired New York Container Terminal and Global Marine Terminal in Jersey City, N.J.), were pretty smart.
And take a close look at the reports from the non-vessel-operating common carriers. Sure, volume and revenue fell, but with few exceptions, there were only relatively minor reductions in profitability. Some might ask, why? Aren’t these two industries tied directly to the ocean carriers? With the same general influences — volume and revenue — wouldn’t their results mirror the carriers?
Let’s take the terminals first: They have long-term contracts with ports at known prices, and long-term contracts with carriers that include a minimum volume guarantee. So when actual volume drops 34 percent over a 30-month period, the minimums kick in, preserving revenue while eliminating significant hours of work, lowering costs.
And the NVOs have a business model that’s tough to beat. They provide services that cost billions, yet they invest little — the carriers do that. Their risk, therefore, is little because they invest little. Again, the carriers shoulder those risks. The NVOs get favorable price treatment from certain carriers, causing other carriers to be relatively competitive, giving the NVOs access virtually to the global fleet at favorable rates.
They use these rates to compete directly with the carriers, and, as the 2009 results show, the carriers lost billions, while the vast majority of the NVOs had slightly smaller profits than the previous year. To be sure, the best and brightest did better than others, but the business model almost guarantees profitability.
Were there lessons in these results? Maybe — there should be. But, as a wise and experienced mentor told me a long time ago, “You don’t make money in the shipping business; you make money from the shipping business.”
2009 proved that, in a big way.
Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. Contact him at firstname.lastname@example.org.