Container carrier success depends on the definition of success

Container carrier success depends on the definition of success

Several articles in recent months have addressed container carriers’ 2017 profitability, initially forecasting more than $10 billion and recently settling on $7 billion as the magic number. As of this writing, I have not seen many final 2017 financial reports, but I will assume that $7 billion is in the ballpark. What does it mean, or prove, if anything?

Some will say, “Well, that’s a sizable sum. They must be doing well.” Others may go a step further and say, “And they are doing that at our expense?” Still others will ask, “How does that translate to return on investment?” And there is likely a segment of those reading this who simply do not care.

Let us put it into perspective — mine. Last year, 2017, was the first year since 2010 that the industry made money. In the preceding six years, the industry lost about $20 billion, and if you take out two or three carriers, the rest lost nearly $27 billion. So, 2017 was a step toward real profitability. It is also a continuation of an industry that historically generates unacceptable rates of return by normal business standards.

I have noted in the past few months that it has become a top-heavy industry, with the top four carriers considerably larger than the rest. When the No. 1 carrier is as large or larger than Nos. 6 through 10 combined, the market dynamics should change, and for a brief period in 2017, they did.

Rates at the end of 2016 and during the first few months of 2017 increased, reflecting the impact of Hanjin Shipping’s August 2016 collapse.

The carriers then reverted to chasing market share, and rates fell, at times driven by supply-demand ratios. But during the late fourth quarter, vessel utilization was relatively high, and the Asia-related markets solidified because of an early Lunar New Year. Yet the spot market rates dropped. Rates have since increased slightly, but remain considerably lower year over year. Why?  

Joker in the deck: government support

The decision-making at carrier headquarters in Europe and Asia seems to have an objective — it is just not very clear what it is. Over time, carriers’ goals must be to sustain profitability to maintain and replace assets, introduce advanced technology, and provide investors with a reasonable rate of return. The continuing joker in the deck is government support — direct or indirect — coming from some Asian countries.

Take a close look at the profit-and-loss reports of several Asian carriers. If you read only headlines, there was a great turnaround from 2016. If you read the details, a substantial portion of it was tied to government subsidies. It is important to understand, though, that regardless of where the money comes from, it can still be spent. But those subsidies also skew the reports regarding true industry results.

My perspective is that historically, government involvement in ocean carriage has dwindled, with many having stopped subsidies completely. That happened in the United States, Europe, South America, the Middle East, and parts of Asia. But government support still exists in a large way in Asia, and I wonder what impact the emergence of the European carriers into three of the top four carriers has on those decisions.

To me, China has an agenda to be highly influential in the world, including the global marketplace. Part of its plan is to have a large transportation network that includes a top player in the container shipping industry. So, will China do what is necessary to make that happen? Will the others do the same? It is speculative at best, but the old saying that all politics is local seems to be the case in Asia.

Back to the theme of this article, what might the various participants in international trade, transport, and logistics think of all of this? For non-Asian carriers, it is somewhat daunting having to compete with entities that do not have to be as profitable to maintain services. For beneficial cargo owners (BCOs), it is likely to vary greatly, but lean toward, “It’s nice to have major service providers who aren’t purely profit-driven.”

This translates to lower rates likely being available. To a segment of the BCO market clamoring for advanced technology and more reliable services with faster transit times, it may slow the process of having those.

For the third-party providers, (non-vessel-operating common carriers, forwarders, and third-party logistics providers) it is a mixed bag. If carriers are aggressive in pricing and move forward with technology and improved services, some may encounter new problems. Many have thrived in the past decade as carriers walked away from smaller segments of the market, leaving the door open for third parties to step in.

Carrier unreliability and labor unrest caused many BCOs to turn to third parties that had access to a larger group of carriers and the capacity required. These two factors have third parties controlling more than 40 percent of the trans-Pacific market. Will that continue?

This year, 2018, may be the year of less rate volatility and improvement in services. But unless the decision-making and underlying objectives of the carriers change significantly, do not count on it.

Gary Ferrulli is chief executive of Global Logistics & Transport Consulting. Contact him at gferrulli@globallogisticsandtransport.com.