Plotting a Sea Change

Plotting a Sea Change

It’s been a perplexing and exciting year for global trade. Volume spiked for all major container carriers in the first half of the year, contributing to their financial recovery after 2009’s disastrous losses measured in the billions. Now some economic indicators have many concerned about a slowdown in the latter part of 2010 and whether that will spill over into 2011.

But let’s take a minute to explore where we are and where we want to be.

For me, the significance of the first half of 2010 can be condensed to a single word: “Surprise!” Virtually everyone was caught off guard by the strength of growth in the first quarter. The lack of understanding the markets, among cargo interests and ocean carriers, left both sides unprepared to efficiently and effectively move goods. It was weeks of frustration, anger and anguish before carriers and shippers woke up to the facts.

Still, the system handled growth in volume of 15 percent or more despite the disconnect between market forecasts and the actual outcome.

Looking forward, significant problems will continue if cargo interests can’t accurately forecast the volumes they’ll move, and when. Lacking that accuracy leaves carriers to their own devices to determine the capacity needed to properly serve the markets.

Frankly, that’s a bad place to be. If shippers underestimate, they’ll face the same level of poor services experienced in the first half of 2010. If shippers overestimate, the supply-demand balance will be thrown out of whack, pressuring rates the likes of which we’ve seen in recent weeks.

Thinking deviously, then, it’s in the cargo owners’ best interest to overestimate their movements, creating the overcapacity that forces oversensitive carriers to cut rates when they see open slots on their vessels. The carriers, however, could simply ignore the cargo owners, ratchet down capacity to ensure high vessel utilization and pricing, but revert to the poor service of early this year, and face the subsequent name-calling rhetoric.

Neither strategy is truly beneficial for either side in the long run. Yes, one side or the other achieves some short-term gains, but at what cost?

Some believe business is like a sporting event — there are winners and losers. Well, who won in the first half of this year? The cargo interests certainly didn’t, and while carriers vastly improved their bottom lines, how much better could profits have been if carriers had the right capacity and equipment to handle the cargo available when it was available?

Here’s the reality: The best business environment for everyone is when there is predictability and reliability on all sides of the equation. That means there’s enough capacity and equipment to maximize the movement of goods at reasonable and stable rates.

Unstable rates benefit few — those who deal in commodities and happen to hit the downward rate cycle during a particular time frame, or those who play the spot market and get a downward break for a few weeks. But should these entities dictate strategies for the vast majority who, in the long run, benefit most from a predictable and stable environment?

Short-term thinking in the age of a mature industry requiring tens of billions of dollars of capital is not a practical long-term strategy for carriers. This isn’t 1980, when global trade was a quarter of what it is today, and when a fleet of 40 ships made you one of the world’s biggest carriers. These are serious times with massive amounts of money at risk, and strategies should be designed to recognize those facts.

And it isn’t in the best interest for the vast majority of cargo interests to have unstable and unpredictable services from far-flung regions thousands of miles away. Adjusting logistical strategies and inventory planning is a nightmare for large shippers and consignees, and change means higher costs and possibly lost sales.

This isn’t a game; it’s big-time business with hundreds of billions of dollars at stake. An atmosphere of enhanced cooperation is needed to capitalize on the opportunities global trade presents today and that will only increase in the future.

Are there those out there today who understand this and are willing to spend the time and energy to make it happen? Or are we all so self-serving that there is no time for such thinking, making the ups and downs acceptable?

Look at 2009 and the first six months of this year and ask yourself this: Do you want to do that again, or do you want to move forward and try to create a better place? Or is it naive to even think in these terms?

Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. Contact him at ferrullig@mindspring.com.