If the liner industry consolidates will that benefit or hurt shippers?
Shippers and liner carriers enter 2014 amid potentially great change in container shipping.
Last June, Maersk Line, Mediterranean Shipping Co., and CMA CGM announced plans to join forces on the major box trades in the second quarter of 2014, creating a vessel-sharing agreement (VSA) called the P3 Network that would operate between Asia and Europe and countries lining the Mediterranean Sea, as well as the transatlantic and transpacific trades. The VSA would operate 252 ships with 2.6 million TEUs of capacity on 28 loops.
On Dec. 5, the U.S. Federal Maritime Commission voted to ask the three carriers for additional information about the P3, and scheduled a global summit on Dec. 17 to discuss shipping regulations with officials from Europe and China.
There were expectations last year that the P3 would result in a response from other carriers, and as 2013 came to a close there were indications that this was beginning to happen.
Carrier members of the Grand and New World Alliance, which had already joined forces in the Asia-Europe and Asia-to-east coast of North America-Asia trade as the G6 (APL, Hapag-Lloyd, Hyundai Merchant Marine, MOL, NYK and OOCL) indicated in early December that they would seek to extend their alliance to include the trades between Asia and the North American west coast, as well as the transatlantic.
In other developments, Germany’s Hapag-Lloyd and the Chilean carrier CSAV said they were discussing a possible merger, while Zim said it’s talking about increased cooperation with the G6 in the transpacific, and United Arab Shipping Co., China Shipping and Yang Ming have increased cooperation in the transpacific.
Game Changer. There is no agreement between shippers and their representatives on what effect the P3 and other industry consolidation will have on shipper-carrier relations — some see it as beneficial, others as a negative, and many simply want more information before making up their minds.
“We believe that the P3 alliance is a game-changer in the shipping industry,” said Beverly Altimore, executive director of the U.S. Shippers Association, whose membership includes eight large chemical companies.
In comments to the FMC, she predicted the P3 “will change the face of the industry, it will change the makeup of the industry, and it will change the carrier-shipper relationship. These three mighty carriers would not be even considering the alliance if the changes that it will bring about would be in any way detrimental to themselves. They are only proposing it because it will give them power and control over the competition and over the beneficial cargo owners that they do not now hold.
“The fear among shippers is that the negative consequences of the P3 alliance will substantially offset any gain, and will lead, in the near future, to shippers being caught in the P3 carriers’ vise grip, resulting in sliding quality service, higher rates, and fewer available liner choices,” she wrote.
In an interview, Altimore said the P3 is “not the great wonder that’s coming to save us, nor is it the devil itself — it’s somewhere in between.”
Her biggest concern is what “may seem unoffensive now could be very offensive in the future” if there is further consolidation by the P3 or other carriers.
“If the P3 is approved for operation, then smaller, less-offensive steps can be implemented one at a time, each producing negative impact to the Shipper, but no one step being enough to nullify the agreement on its own, until the Alliance has become powerful enough to substantially affect the competitiveness of the ocean shipping industry and the overall cost of foreign trade,” she told the FMC.
Angelo Nino Caponi, president of the Med-American Shipper’s Association, also expressed concern that the P3 “will ultimately destabilize the marketplace and lead to unreasonable increases in rates and reduction of services.”
However, the majority of letters from 53 companies released by the FMC in response to its request for comments on the P3 proposal cited benefits they expect from the partnership, namely enhanced ocean services including greater port coverage, increased overall stability in the market, service stability, consistent and competitive transit times, and increased number of weekly sailings.
Klaus Jepsen, group CEO, and Christian Mogelvang, U.S. president of Shipco Transport, believe the shipping public and non-vessel-operating common carriers, such as their firm, will benefit from the three companies collaborating.
“It would solidify transit time, the overall on-time departure and arrivals, and make the carriers more responsive and cost effective, all of which, not necessarily by increasing rates,” they explained in a joint letter to the FMC. “Further it is our understanding that the three carriers that make up the P3 will continue to conduct sales, marketing and customer services completely independent from one another, which will continue to ensure the individual approach and specificity that these carriers have developed over their many years in the business.”
Alan Baer, president of TTS Worldwide, another NVO, said “I have found that carriers act in their own self-interest first, and then in the interest of the conference or alliance. This self-interest philosophy should protect the bulk of the shipping public from the danger of escalating pricing, shortage of equipment and shortage of space.
“In fact, a streamlined approach to port calls, vessel rotation and relay hubs should lead to higher levels of schedule integrity, shorter transit times and increased box turns all of which should help shipper’s supply chains reduce costs, and provide the carriers with improved operating margins,” Baer said.
Bruce Carlton, National Industrial Transportation League president, said in an interview with American Shipper “in broad terms shippers are supportive of these vessel-sharing agreements and other alliances because they can and have improved service, giving shippers more port calls, more lifts, and bigger port ranges than a single company can do on its own because a single shipping company just doesn’t have enough capacity and vessels.”
But that support has always come with an important caveat, he said, that the alliance partners “maintain a fully competitive market place that they really are at arm’s length and competing for the shippers business on the basis of rates and service.
“To a great degree, the shipper is indifferent as to which company physically carries the box and instead focuses on the cost of transport and service levels provided,” Carlton explained. “Service is more than just lifting the box on and off the ship. This has become a very sophisticated business and the carriers, almost all of them, offer a menu of services on paperwork, on inspections, and customs — you name it – and, of course, including through-delivery to an ultimate destination.”
The NIT League said it particularly wanted to find out more about the London-based operations center that the P3 carriers are planning to set up.
Siva Narayanan, director for international operations and warehousing for the chemical company Solvay, noted in contrast with the G6 where operational control of ships is with each line, it sounds as if the P3 is centralizing control.
That difference is important, he said, because with most VSAs “the operator still has the flexibility of offering those bells and whistles that differentiate them. For example, if I am APL, I can say on my ship I can give you top stow, or on my ship I can give you a late gate.”
Narayanan feels that with the P3 there may be a more homogenized product or one where the individual line has less control.
“What is going to be the differentiators between Maersk and CMA. Is it going to be the boxes? Is it going to be documentation? Is it going to be customer service? And if that is so, then that needs to be clearly spelled out, because these three companies will soon look like non-vessel-operating common carriers with equipment,” he said.
Peter Friedmann, executive director of the Agriculture Transportation Coalition (AgTC), said rather than get answers through the FMC or press, his group has met directly with top executives at the P3 carriers to better understand their plans and find out “whether there is going to be any reduction in frequency of port calls, whether there will be impact on costs or pricing, and how they intend to enhance their bottom line while maintaining for improving the service for the exporters.”
Friedmann noted “if at some point in the future service levels are impacted and so forth there will always be the opportunity — which the AgTC has never been shy about — to go to the FMC, go to Capitol Hill, etc.
“These companies are not merging. It’s not an acquisition and that’s a difference. An acquisition, a merger is hard to undo. This is not that, or at least it does not appear to be that yet,” he said. “So, therefore, we feel we will be able to have ongoing ability to impact the services they provide to U.S. exporters of agriculture and forest products.”
Equipment Availability. Another concern of shippers is the availability of equipment.
Narayanan noted when an exporter needs containers, “the availability of equipment at the right place at the right time is at best spotty” at some inland locations, especially for 20-foot containers needed by chemical shippers.
He asked: “What good is it to have a rate, what good is it to go through all these gyrations of rate negotiations and GRIs (general rate increases) and everything else when all those sales and marketing and pricing efforts are not connected in providing equipment?
“I can have a sales representative come to me and say ‘My transatlantic lanes are light, what can you put on my ship?’ And I can say, ‘Sure I can put stuff on your ship, but where is the equipment?’”
Narayanan, who formerly worked for liner carrier APL, said “filling slots, it’s not the problem today; the problem today is getting equipment to the right place.”
Friedmann said both the Pacific Northwest and Midwest are important areas where agriculture and forest product exports originate, but “capacity and container availability is perennially tight, perennially challenged.
“That’s not new, but it continues,” he added. “I would say that right now, as we’re going into the new year, it is not a crisis situation. In past years, from time to time, it has been a crisis. It is not that now. It is more or less the typical environment in which exporters have operated.”
But Narayanan believes equipment availability has become an increasingly important issue as the U.S. economy changes and exports of intermediate goods become more important. He also noted the importance of assisting exporters given President Obama’s goal of wanting to boost exports.
“As an exporter if somebody tells me ‘I’m sorry but I have no equipment because there are no imports,’ the question I have is ‘Why do I care, why do you peg me with somebody else? You should serve me based on my merit.’”
Narayanan thinks part of the problem comes from carriers reducing the number of containers they have for every slot on their ships and their drive to reduce repositioning costs. That kind of cost-cutting can be good, but he said “maybe they are cutting it too thin. That the reason ships are not filling up is because of not enough equipment.
“The economy has changed. Today the ships are three-times larger than they were 15 years ago. Today the purchasing power of the world and the productivity or the amount of work we ship out of the U.S. and the mix of commodities we ship, all that has changed,” he said. “The model is not catering for the needs of today.”
He said the lack of equipment forces him to spread his business among many lines in the hope of getting equipment.
While it might be attractive to concentrate business with fewer lines, Narayanan said “service levels of equipment are so spotty that you spread your cargo over many lines, and with that there is a perceived impression of lack of loyalty” by some carriers. He added “It’s not because of lack of loyalty, it’s because of necessity. We have to find a new model. We will have to have some kind of collaboration between the shipping lines and the shipper.”
Data Quality. Narayanan is a member of the shipper council that the information technology company GT Nexus has established.
Greg Kefer, vice president of corporate communications at GT Nexus, pointed to the collaborative work done by the council and carriers to vastly improve the quality of ship schedule information.
In 2007, few of the carriers feeding GT Nexus data could provide 90 percent accuracy for measurements such as the estimated time of arrival and actual time of arrival and departure for ships, the movement of containers in and out of a terminal, and when containers are loaded and discharged. Today, the vast majority of them can provide most of those metrics with 90 percent accuracy.
“If you can’t see what’s broken, it’s nearly impossible to fix it,” Kefer said.
Narayanan suggested collaboration between shippers and carriers may not even be in the “freight circle,” but might involve a shipping line becoming a valued partner in some other area so that the shipper and carrier are not just having a transactional interaction but a collaborative effort.
As an example, he said, Solvay might benefit from the ability to test paint on a carrier’s ships or a carrier might buy a fuel additive from a chemical company.
Narayanan said carriers also need to decide whether they are a “strategic, boutique industry” or “essential industry.”
A firm like Tiffany can charge large margins, raise prices at will and survive, and “if they go bust, nobody would pity them, because they decided to take a chance and gamble for success in the high end,” he said. “But if I’m an essential industry, like your local fire department, you don’t expect your fire department to make huge profits. The fire department just has to stay afloat, but the community has a responsibility to keep that fire department afloat.
“The question is: What is a carrier today? A carrier today would sometimes like to be like a Tiffany when they think the price is right. At the same time they say,’ you’ve got to keep me afloat.’ It can’t be both,” Narayanan said.
On-Time Performance. Shippers are increasingly measuring carrier performance by looking at key performance indicators (KPIs), particularly on-time delivery.
Sandra Moran, vice president of industry and product marketing at INTTRA, said analysis of on-time container delivery reveals that although there have been some periods of improvement, overall reliability remains relatively unchanged since INTTRA published its first report in July 2012. Global on-time delivery in June 2012 was 64 percent, while in the last published INTTRA report for September 2013, overall reliability stood at 65.7 percent.
“There continues to be a gap between schedule reliability (as reported by a number of sources including SeaIntel, Drewry and the ocean carriers themselves) and on-time container reliability as reported by INTTRA. Overall averages are 16 points apart, with less variability in specific trade lanes than was witnessed in July 2012,” Moran said.
The London-based shipping consultants Drewry noted in the third quarter of 2013 there was a drop in both ship-level and container-level reliability KPIs, but this was due to developments in the Asia-to-Europe and Asia-to-Middle East/Indian Subcontinent trades where on-time performance of containerships fell to 69.5 percent in the third quarter, a 1.4 percent point decline from the second quarter.
Drewry said the latest result represents the third consecutive quarterly drop in average on-time performance and is the lowest score since the third quarter of 2011 (61.1 percent). It noted data derived from e-commerce platform provider CargoSmart revealed that while shipments from the origin ports were no worse than in the second quarter, the delays in cargo availability at the destination ports were caused by lengthier than scheduled transit times at sea.
The good news is “the U.S. trades are doing fine,” said Simon Heaney, a Drewry researcher and consultant, with on-time performance in the transpacific up 1.7 percentage points to 76.5 percent.
The relationship between pricing and reliability is tenuous, but one way of looking at the data is that poor performance is somehow linked to the extreme rate volatility in the Asia-Europe trade, he said.
Not that carriers are deliberately sabotaging their own schedules, Heaney added, “but if they are bleeding in one trade, they may not make the extra effort.”
“Defibrillator.” Increasingly carriers are using “blank” sailings — where they suspend a normal weekly voyage — as a capacity management tool. This is particularly popular in the winter season when cargo volumes are light.
That can be a problem for shippers who need to move cargo during those periods, but Heaney said carriers are getting better about signaling their intentions far in advance so shippers can make alternate arrangements. “Previously they were doing it at the very last minute,” he said.
He said suspended voyages seem to coincide with big GRIs announced by carriers, which can lead to minor improvements in load factors, but he doesn’t believe they are a long-term fix to overcapacity.
Heaney expects freight rates in 2014 will be similar to what they were in 2013, with perhaps a slight improvement for carriers. He also predicts pressure on the spot market will not go away.
He said carriers have been using repeated GRIs as a sort of “defibrillator” injecting life back into freight rates, with spot rates tapering off after a short time until the next jolt from a GRI.
The container industry may make a small profit in 2013, he added, but there is great variation among different carriers, with Maersk and CMA CGM, for example, doing well while others are experiencing losses.
There has been a lot of speculation about what the P3 will mean for service and pricing.
In August, Drewry said “while the P3 will contribute to the trend towards lack of service differentiation in container shipping, shippers will still have ample options to spread their volume between different ocean carriers and alliances in order to reduce their risk and dependence and maintain competition.”
Drewry said its monitoring of ship schedule reliability in its Carrier Performance Insight report “shows that MSC’s on-time performance is much lower than its prospective P3 partners and there must be a concern about how these carriers will operate together.”
Heaney noted, however, that MSC’s performance has been improving.
While some shippers are wondering whether the P3 will mean Maersk service at MSC prices or MSC service at Maersk prices, Heaney said “My gut is that you’ll get Maersk service at Maersk prices” from the P3 carriers.
“It will only be proven in time,” he said, but the P3 “is very much a Maersk-driven concept and project.” He pointed to the fact that the P3’s London-based operations center is being headed by Lars Michael Jensen, a former Maersk trade manager.
“Maersk is not going to make this effort only to see prices tumble to the MSC level,” Heaney said.
