Shipping’s Rich Get Richer

Shipping’s Rich Get Richer

When anyone talks about the “transfer of wealth” today, they usually are describing how the rich are getting richer while everyone else stagnates or gets poorer. But it also applies to shipping, where a multibillion-dollar transfer of wealth is under way as a result of falling freight rates.

Money is flowing out of the pockets of container line operators and into the hands of shareholders of major accounts. As container lines seek government support (Hapag-Lloyd), receive cash infusions from their parent (Zim), or go to shareholders for additional capital (APL), large shippers are reporting earnings that look better than they otherwise would, specifically because of the decline in rates.

“It is definitely a meaningful part of the cost equation,” said Charles X. Grom, a J.P. Morgan retail analyst in New York.

Container lines’ global revenue could decline to $188 billion from $243 billion in 2008, according to Drewry Shipping Consultants, with as much as $30 billion of the drop resulting from falling freight rates as opposed to declining volumes.

With container volumes concentrated among the largest shippers, it’s not difficult to see how a material impact would emerge for the biggest accounts. The following exchange from the Aug. 26 earnings call of Dollar Tree, which reported a 51 percent increase in second-quarter net income, illustrates the growing interest in ocean rates as a positive factor in earnings:

Grom: I just wondered if we can just dig into the gross profit margin line a little bit. You talked about freight being a key contributor. And, obviously, that’s driven (by) diesel costs. But the ocean — with the ocean rates coming in second quarter, just wondering if you can maybe dissect how much of the freight benefit was the lower diesel cost versus the ocean rates.

Kevin Wampler (Dollar Tree CFO): As we looked at it — and the logistics team has done a nice job with working on the ocean rates. We really got that done in May and start(ed) seeing some of the benefits here in second quarter. And, basically, what we’ve got is the freight benefit is about half related to diesel, about half related to ocean freight.

Grom: And just to clarify that, obviously, diesel is going to be a benefit in the third quarter. But you would suspect that the ocean rates would continue to benefit beyond the third quarter, correct?

Wampler: That is correct.

The benefits are not just being seen by retailers, but by all major container shippers who to one degree or another negotiated lower rates this year.

“We benefited like everyone else,” said John Isbell, a supply chain consultant who until recently oversaw international transportation at Nike, which ships more than 100,000 TEUs annually. “Just like at any other company, all of that savings falls directly to the bottom line.”

The wealth transfer from carriers to their customers has been under way for years, although it’s become more noticeable this year with significant rate declines. Liner shipping’s return on equity for years has lagged that of apparel, computers, footwear, home furnishings and retail, according to studies of the industry.

And the transfer of wealth is likely to continue; Grom says he expects benefits for Dollar Tree and other companies to extend beyond the third quarter. “The reason why I asked is, how much longer is this going to be a benefit?”

That is a question many are asking as they assess how wide the gap is between container capacity and demand and how long it will take to bring it back into balance. The most extreme views say that may not happen until 2015.

But even today, perhaps with an eye on recent spot rate increases spawned by carriers’ recent surge of rate recovery announcements, some shippers acknowledge that rate declines are not permanent. Lasting shareholder value, they point out, will come not from cyclical fluctuations in rates but from structural adjustments in the supply chain to permanently take out costs.

Isbell said shippers “need to wake up to the fact that now is the time to plan for the future. If you want to maintain these savings to some extent, as rates go back up, (you need to examine) what are you doing to lower your overall operating costs and trying to retain as much transportation savings as you possibly can.”

As recently reported in the JoC, Polo Ralph Lauren said in its second-quarter earnings report that its results were improved by supply chain innovation such as shifting more product to ocean from air freight by adopting an “air traffic controller” system that fine-tunes the use of air for only the most urgent shipments. Isbell mentions such initiatives as container packing optimization and purchasing ex-factory as areas that still hold potential for many shippers.

The message is simple: Low container rates will not last forever.

Peter Tirschwell is senior adviser for The Journal of Commerce. He can be contacted at 973-848-7158, or at ptirschwell@joc.com.