Tick, Tick, Tick ...

Tick, Tick, Tick ...

It’s getting late in the eastbound trans-Pacific. It is already March, the Trans-Pacific Maritime Conference is upon us, and the major carriers have yet to agree on and communicate a game plan for how they see the market unfolding this year. The carriers, acting through the Transpacific Stabilization Agreement, usually finalize and announce a business plan by November, stating their objectives and rationale for rate increases in spring contract renewals.

This year, because of the extraordinary fourth-quarter 2008 falloff — total container volume at Los Angeles-Long Beach plunged 14 percent year-on-year — and the impossibility of predicting where things are headed, the carriers were unable to agree on a number to put out to the market.

As a result, carriers enter the annual negotiating cycle lacking the kind of unifying message that in past years enabled them to break through shippers’ objections and achieve progress on rates. Last year’s story line was surging fuel prices, a compelling message that enabled the carriers to secure higher surcharges and maintain stability in overall revenue through the early fall.

This year, the carriers were hoping the story would be a planned withdrawal of capacity sanctioned by the Federal Maritime Commission. That hope was dashed when the plan exploded in controversy and it became clear it would not gain quick FMC approval.

The carriers’ next move is unclear. The market, to put it bluntly, is in the toilet. Overall trans-Pacific eastbound volume plunged 20 percent in December and January, with no evidence of a pre- or post-Lunar New Year surge. Average vessel utilization is in the 70 percent range — with some ships sailing in the 60s and perhaps a few in the 80s, said Bob Sappio, APL’s senior vice president for the trans-Pacific trade.

“The market is very, very weak, and going along with that hand in hand, the rates are unstable and going down. We are not at the levels of Asia-Europe, thank God, but there is tremendous pressure as many carriers are chasing rates down to fill underutilized assets,” he said.

With coordinated capacity management off the table, any collective action by the carriers leading up to the busy May-June period of contract renewals will have to be on the revenue side. The carriers, after meeting in mid-March, still could take a stab at some kind of declaration on rates. Such a move would come on the heels of aggressive individual carrier stances in other markets, particularly Maersk’s modest increase in the Asia-Europe trade announced in early February.

“I do believe that carriers are being vocal individually for rates to stabilize and gradually come up,” Sappio said. As to whether the TSA comes out with an announcement, “it’s under consideration,” he said. “Carriers are talking about the need to stabilize rates and get them to levels that are sustainable.”

But with supply and demand so far out of balance, it’s debatable how much difference a TSA pronouncement would make. Capacity in the Asia-to-West Coast North America market declined 9 percent in the last six months of 2008, according to Containerisation International, and Zim, MOL and NYK plan to take more tonnage out of the market.

Yet with volumes declining at substantially greater rates and with more than 300 idled vessels comprising nearly 9 percent of the world fleet hanging over carriers’ heads, the imbalance could persist well into a recovery. There is no talk among the lines of a late-2009 squeeze in capacity, despite one TSA line’s prediction of a 6.5 percent rebound in the third and fourth quarters.

If anything, the refuge for carriers will be in playing to shippers’ needs. And while some shippers understand the $200 per container offered in a discount will be more than eaten up by higher inventory costs and loss of flexibility encountered in a severe delay, many others face mandates to squeeze all possible costs out of the supply chain. Thus, they’re throwing to the wind the time-honored principle that too much short-term gain at the expense of the vendor breaks down trust and undermines service quality and reinvestment.

“In the past, rates were always important, but so was the relationship and value of the carrier,” one senior carrier executive said. “That has gone out the window at the moment.”

The long-term consequences — consolidation — will have a more severe and lasting ramification for shippers. The share of the largest carrier in the eastbound trans-Pacific, Maersk, is only 11.7 percent.

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