Crystal ball a bit hazy for container carriers

Crystal ball a bit hazy for container carriers

With the first quarter of 2019 in the rear view mirror, we get a good look at problems facing the container shipping sector.

Ocean carriers have reported mixed results for 2018, but all show increased revenues on bigger volumes. The decline in earnings were tied to costs, fuel costs in particular. The industry as a whole made money, $1.5 billion, for only the third time in the past 10 years. But during those 10 years, losses exceeded $30 billion.

After a roller-coaster contracting season since December, the ride appears to have settled down. The apparent trans-Pacific eastbound outcome is likely to be an increase to base rates and a floating bunker adjustment factor (BAF).

The latter is a work in progress — with levels and calculations to be decided. There is some uncertainty concerning the volume of low-sulfur fuel the market will produce, but some carriers have contracts in place already that they claim cover their needs. With the International Maritime Organization’s low-sulfur fuel mandate effective Jan. 1, 2020, will shipments be front-loaded to avoid any BAF increases scheduled later this year? We’ll see how that plays out.

On the capacity management scene, carriers have continued to flex their schedules to meet market demand, but it’s not enough to hold the high level of trans-Pacific eastbound spot rates enjoyed during the last few months of 2018 and the first few weeks of 2019.

Weaker volumes — tied to front-loading of imports to avoid pending US tariffs in trade with China — drove down spot rates. Lower rates are the norm, however, at this time of year, and year-over-year comparisons seem favorable to the carriers. Could they make money in 2019?

Changing gears, the labor front is not as settled as all thought despite contract extensions signed by the International Longshore and Warehouse Union (ILWU) on the West Coast and the International Longshoremen’s Association (ILA) on the East Coast.

Most shippers breathed a big sigh of relief, believing there would be years of labor peace, but the issue of automation keeps cropping up and looms as a sticking point and threat to all involved in container shipping.

ILA leadership has urged its members to raise the productivity of the cranes in terminals in the Port of New York and New Jersey to 27 moves per hour per crane from the current 25 moves per hour per crane. That’s a telling announcement; a first for labor management to even discuss productivity, let alone endorse increasing it.

But it also exposed a pretty well-kept secret on the current productivity levels in NY-NJ terminals. We often hear about the US East Coast productivity levels at or above 35 moves per hour, but apparently those are not the numbers in NY-NJ. The NY-NJ numbers are at or slightly below the ILWU levels, not a desirable place to be.

While the US East Coast and Gulf Coast ports have made great strides in capturing market share from the US West Coast, their gains are tied to the widening of the Panama Canal and the larger vessels plying those lanes. And the only words heard from the ILWU are that the union opposes automation, regardless of what their agreed-to contracts says.

The loss of market share doesn’t seem to bother the ILWU; the overall volumes haven’t slipped due to trade growth. But while the East Coast terminals are adding dockworkers because of increased volumes and market share, there’s not so much of that happening on the West Coast.

In the end, the West Coast will have lost jobs, and getting them back is not in the cards with the ILWU’s attitude on productivity and automation.

Chassis availability, demurrage and detention application, and adoption of state-of-the-art technology are all works in progress. One leftover issue — carrier reliability or on-time schedules — seems to be getting worse. While 40 percent reliability is the new norm, there were some schedules at near 20 percent reliability in the past several weeks.

Congested terminals on both sides of the ocean, the chassis situation in the US, and some skipped sailings all contributed to the deteriorating results. On the flip side, shippers continue to be very weak in providing accurate forecasts, and no shows remain above 20 percent.

What’s ahead? It’s a function of the market and the carrier reaction. If the volumes are relatively normal in terms of seasonality, and carriers continue to manage capacity as they have during the past eight months, then it should be a relatively calm and stable environment.

If the markets really soften, how will the carriers react? If they chase volume and market share, then the red ink flows. If they truly manage capacity to reflect the market, regardless of which direction it takes, they could see some black ink in financials, at least in the trans-Pacific.

As usual, there is no shortage of drama and concern in the container shipping industry.

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