NVOs Question Carrier Health

NVOs Question Carrier Health

Non-vessel-operating common carriers don’t think the outlook for carrier rate increases this year is very strong. NVOCCs don’t depend on rate increases to make a profit, because they mark the rates up to their customers, but they worry that low rates will force carriers to cut back on the level of ocean services they resell.

“When you drop your rates across the board, no one wins,” said Michael Cadden Troy, CEO and founder of Troy Container Line, a U.S.-based NVOCC that wholesales vessel space to third-party logistics providers and other NVOCCs. “With the rates going down to where they are now or where they were two or three years ago, it takes out the possibility of carriers offering services that we need as NVOs, and, quite honestly, the consumer needs.”

The problem for carriers, of course, is that demand is flat, especially in the major east-west trades, and a record amount of new vessel capacity is scheduled for delivery this year, which will increase the size of the container fleet by 9 percent, according to research analyst Alphaliner.

“Total volumes in the trans-Pacific and trans-Atlantic with the U.S. will probably remain somewhat flat this year,” said Frank Guenzerodt, president and CEO of Dachser USA, a unit of Germany-based Dachser, one of Europe’s largest NVOCCs.

He thinks it will be hard for carriers to sustain their proposed general rate increases. “Rates in the trades with the U.S. are going to continue to be volatile, especially in the trans-Pacific,” Guenzerodt said. “If you go back 10 to 15 years, you had one negotiation and the rate was set. Now we have a monthly GRI, of which some stick and some don’t. It’s a very fluid situation with renegotiation of rates almost on a weekly basis. So I think it’s going to continue that way through 2013 as carriers try to make their losses back.”

But he thinks new ship deliveries are likely to undermine GRIs. “There will be a downward pressure on rate levels again,” Guenzerodt said. “I don’t think we’ll see the $800-per-TEU rate to the West Coast again, but at the moment, they are attempting levels that are not sustainable.”

Unless carriers can manage the new capacity coming to market by slow-steaming and idling or scrapping of vessels, they won’t be able to sustain rates, because all it takes is one carrier to set off a ripple of rate cuts, Troy said.

“Unfortunately, with the capacity coming on stream, there’s not a lot of patience in our industry,” he said. “Carriers look at volume where the costing is not always looked at as deeply as it should be. Some carriers want to be larger, so they are looking at more volume.

“I don’t think it helps the carrier industry,” Troy said. “If you have an asset like many of the carriers that have invested millions and millions, if not billions, in their assets, then you need to see if there is the possibility to maintain rates. Having those assets afloat every day, you need a return.”

The number of carriers has been shrinking every year, he noted. “The more they shrink, the less competitive the market becomes,” Troy said. “The carriers need to be strong and make money; otherwise you have less direct services, prices going up, but services going down because you have less competition.”

Contact Peter T. Leach at pleach@joc.com and follow him at twitter.com/petertleach.