With the second half of 2018 making its debut, we await first-half financial reports of ocean carriers and weigh the events and policies initiated in the first half of the year. High fuel prices have impacted the bottom lines of carriers, with virtually no recovery mechanism arising in the first half. Charter hires and feeder costs are up, and inland transport costs for intermodal moves continue to affect financials with little recovery in place.
Spot market prices have bumped up in the trans-Pacific, affecting the spot market volumes but not the contracted volumes. The threatened trade tariffs are now in place and will impact containerized volumes. But for how long and by how much?
Ocean carriers have right-sized fleets, but…
Unless there is a significant effort to right-size the fleets to the markets, spot rates will drop again; it’s a matter of when. There are some signs carriers are trying to manage capacity. All three global alliances are eliminating a string in the trans-Pacific. Maersk, however, has already said it’s temporary; it plans to reinstate the service later this year, anticipating trade growth requiring additional lift. And now we see the 2M Alliance-Zim cooperative agreement, which takes two strings out of the US East Coast fray, further reducing the Asia-US capacity.
In the Asia-Europe markets, similar adjustments are being made. But overall there is no evidence that significant chunks of capacity are coming out for any real length of time. That indicates short-term thinking with the impact being a bounce back in the third quarter.
On the market side, there was a downward slide in volume in May and June, but the retail people tell us they will have a record-breaking “peak” in the next couple of months. The trade disputes, if they last, must have a negative impact over time.
It’s been relatively quiet on the labor front — a good thing — with an announced extension of the International Longshoremen’s Association contracts for US East Coast and Gulf ports. Hopefully, all will adhere to what was agreed; what that is has yet to be made public.
Automation had to be part of the discussions. And while recognizing that an agreement on automation is in place on the West Coast, there has been virtually no change in crane productivity, leaving them well behind the rest of the modern world and the US East Coast and Gulf Coast in that major cost impact issue. Getting the vessels into and out of ports efficiently and effectively is critical; at this time, the bottleneck is at the cranes.
US West Coast’s poor productivity has caused market share losses
The relatively poor productivity and past labor disruptions have led to major changes in cargo interests’ logistics plans, and the West Coast has lost considerable market share to the US East Coast and Gulf Coast. The pure import volume increases over a lengthy period has kept traffic rising slowly, but chunks of the market have shifted and will continue to do so, absent some reasonable resolution to productivity and reliability issues.
Technology continues to garner a lot of ink and investment capital. I’m asked three to four times a month by venture capital people to give them my perspective on what, and who, is or may be involved. I think that with so many versions of what is attempted to be achieved, with no standards or commonality, it’s difficult to envision an industrywide benefit in the near future.
Rumors abound again on possible mergers. Several companies reportedly are looking seriously at Hapag-Lloyd, but the latter is essentially saying it isn’t interested, at least not interested in one specific approach by CMA CGM.
In some ways, it makes commercial sense for Hapag-Lloyd to be acquired or to merge with another carrier. I think a personality issue would prevent a deal being made. I recall a couple of decades ago the rumors involved a merger of Hapag-Lloyd and Hamburg Süd, which then made great commercial and financial sense. But personalities got in the way; it may be a similar thing today.
Back to financials: the economic well-being of the ocean carriers and some of the issues impacting the negative results are being forecast by carriers themselves, with concomitant reaction from the financial community. The apparent lack of capacity constraints, despite temporary changes in the trans-Pacific as well as the Asia-Europe lanes, doesn’t really address the supply-demand issues that have been prevalent for several years. They continue to replace relatively smaller ships with larger vessels on a one-for-one basis, with little effort to adjust schedules to fit the market.
Fuel surcharges should have been implemented sooner
While carriers have focused on cost cutting for several years, they failed to recover what is a significant increase in fuel costs on a timely basis, and it shows in the financial results. They waited far too long to do something to recover from higher fuel prices in the spot market; contract clauses don’t allow increases or surcharges. It appears that, financially, 2018 will look like 2011-2016 for carriers.
For shippers, that’s good news from an international transport cost perspective. The negative for them is the potential detrimental impact of a trade war on their ability to buy, sell, and compete in global markets. And domestically, they are paying considerably higher rates than a year ago because of fuel increases and tightness in capacity.
We’ll see soon the real economic impact on ocean carriers for the first half of 2018, then await the trade war effect on all parties during the second half and beyond.
Gary Ferrulli is chief executive of Global Logistics & Transport Consulting. Contact him at email@example.com.