Times have changed

Times have changed

One of the biggest issues that hung over the World Shipping (China) Summit Nov. 2-3 in Shenzhen, China, was whether container lines will be able to hold the line on freight rates next year. Conventional wisdom says no. But conventional wisdom this time around might be wrong.

Nine out of 10 investment analysts who cover container shipping are bearish on the industry. They see the industry in cyclical terms, and believe the large numbers of post-Panamax ships set to enter service in 2007 and 2008 will inject excess capacity into the market that will drive down rates. The 250 ships in excess of 5,000 TEUs that are currently on order for delivery through 2008, according to H. Clarkson, mean an additional 50 percent of today's deployed capacity is on order or under construction at shipyards in Korea, Japan and China. Historically, that's a high percentage.

The carriers are pointing fingers at each other - never a good sign. They're blaming their fellow lines for cutting rates over the past year in the interest of preserving market share. "K" Line's president and chief executive, Hiroyuki Maekawa, told the summit that his company's profit will decline by $400 million in 2006 from 2005 because of a combination of higher fuel costs and lower rates. "We've been irresponsible and (are) easily relying on rate competition to secure our own respective market share once adverse market conditions arise," Maekawa said in a speech.

What's more, shippers, who are never gentle with carriers when it comes to rate negotiations, will be cutting the lines no slack in 2007.

The economy in the U.S. is slowing - real gross domestic product increased at an annual rate of just 1.6 percent in the third quarter of 2006, retail sales growth shows signs of weakness, and holiday sales have started earlier than ever - and the 2007 negotiating season next spring promises to be brutal.

With this as a backdrop, how could things possibly be different next year? How could the majority consensus of the analyst community be off the mark? To find the answer, you have to look beyond the obvious.

The obvious is well known. Carriers make several arguments, noting that the true supply-and-demand situation needs to take into account factors often overlooked. These include the actual operating capacity of ships, which is lower than the posted TEU capacity; the fact that landside bottlenecks, such as rail congestion in North America, reduce the effective capacity of the end-to-end container system; and the extended time it often takes to rotate new tonnage into the complex deployments of the multicarrier alliances that dominate the industry. All true. But the real change is time - times have changed.

Look at the industry today. The center of gravity has shifted to Asia, and especially to China. China accounted for 11 percent of Asia's container trade with the U.S. in 1992 according to PIERS Global Intelligence Solutions data; last year, it accounted for 65 percent. Of the world's top 20 container ports in 2005, 14 were in Asia, including the top five, in order of volume, Singapore, Hong Kong, Shanghai, Shenzhen and Busan.

With that, the influence of Chinese leaders such as Capt. Wei Jiafu, Cosco Group chairman and chief executive, has grown. Capt. Wei's stature in the industry hit a new high last week following the triumph of the 3rd World Shipping (China) Summit, which he started and which is now unquestionably the most important shipping conference in Asia and probably in the world. There is no industry event in the world today that attracts such a large number of carrier CEOs, port directors and association chiefs, and the reputation of the event as a Davos of the shipping industry is only growing. The 4th Summit, which promises to be even larger, will be held next fall in Tianjin.

And real leadership among container carriers, when it's manifested, can make a difference. Olav Rakkenes of Atlantic Container Line pulled the trans-Atlantic trade out of a deep trough in the mid-1990s. Without leadership, carriers all too often pledge at Box Club meetings to hold the line on rates only to allow their sales forces to aggressively undercut each other, even when supply and demand fail to point to weakness. Leadership is poised to reassert itself, this time on a global level.

Many will counter that history of rate cutting will repeat itself, as it has many times in the past. Is the situation different today? The idea can't be dismissed.

Peter Tirschwell is vice president and editorial director of Commonwealth Business Media's Magazine Division. He can be contacted at (973) 848-7158, or at ptirschwell@joc.com.