New world disorder
Sailing through the anchorages off the coast of Hong Kong and Singapore these days must feel like driving through a suburban subdivision of newly built houses with 'for sale' signs in front.
The fleet of unused, empty containerships (many brand new) in many ways can be considered the ocean carrier industry's home mortgage disaster. The root causes are much the same: ambitions too high and economic fundamentals too low.
When the world slows down, it gets pretty lonely, whether you're being foreclosed or laying vessels up.
Now I won't bother with an exact number of containerships that are currently laid up, nor what percentage of total capacity that represents, because by the time you read this, it will have invariably increased.
But at the time of writing, about 11 percent of the world's containership fleet capacity was standing still, not earning its owners any revenue and depreciating in value by the day. Some experts, including ship owners themselves, see that number going up drastically this year and maybe even next year.
What this shrinkage in capacity has done is squeeze carriers on both ends. Vessel and service withdrawals aren't exactly anything new for carriers in recent years ' to meet seasonal demand, and sometimes to bring the supply/demand equation back into their favor, carriers have traditionally maneuvered their fleets in such a way.
The difference this time is that these retrenchments aren't useful, they're necessary. Beyond necessary, in fact.
Significant drops in weekly capacity in the last three months of 2008 on both the transpacific and the Far East-to-Europe trades didn't stop rates from also falling precipitously. It was particularly noteworthy between Asia and Europe, with capacity falling 17.3 percent, according to ComPairData. But the average freight rate fell even further, 42.8 percent from November to January, according to Drewry Shipping Consultants. Things will have only gotten worse in the three months since.
That means revenue per TEU has been sucked away on the major carriers' two largest trades at the same time that volume is falling in real terms (APL said volumes dropped 35 percent in the first six weeks of 2009 while revenue per FEU fell 11 percent) and at the same time as most carriers are having to pay huge sums for new vessel deliveries that they don't even need or want right now.
This month is an incredibly important one for the liner carrier industry. Perhaps that can't be overstated. This month, annual contract negotiations between transpacific carriers and shippers will wrap up, and if carriers operating on the transpacific aren't able to hold some kind of line on rates, then we may see a bloodbath this year.
Rumors are already circulating that some carriers are willing to cut rates 33 percent or more simply to secure volume. NOL chief Ron Widdows all but threw in the white towel in early March, telling Lloyd's List that he expected no favors from shippers in negotiations this spring, but that he only hoped that they would 'leave me a little bit.'
At the end of 2008, the Transpacific Stabilization Agreement, where Widdows also figures prominently, foresaw the doom that lay ahead. In a message ostensibly aimed at shippers but just as much directed at member carriers and Maersk Line (one of only two major transpacific carriers not in TSA), the discussion agreement said that carriers had to negotiate rates that were sustainable. To do anything else would be devastating for the industry.
And that was before rates bottomed out between Asia and Europe. Spot rates on the transpacific are still better than Asia-to-Europe, but if shippers manage to negotiate yearlong bargain-basement rates before May 1, this will get really ugly.
TSA tried to initiate a plan to allow transpacific carriers to collectively negotiate capacity ' a bid to somehow bring capacity closer to demand. But that plan was rebuffed before it ever even made it to a Federal Maritime Commission hearing.
'We will never know whether such an effort would have produced a better outcome than what the shipping public will face with uncoordinated service reductions and capacity decision-making,' said Chris Koch, World Shipping Council president and chief executive officer.
Now for every shipper excited by the near certainty of fire sale prices for ocean services, there should also be a shipper who is cognizant of the fact that it won't be like this forever. There may be a time in the not-too-distant future when carriers hold the upper hand. And seeking, and getting, bottom-barrel rates will only help drive certain carriers out of business this year and next, narrowing the range of potential service options in the future.
That's not to say that shippers shouldn't take advantage of the situation (nor is it to say that shippers don't face their own cost pressures). But they shouldn't be too eager to sign up for rates that look too good to be true.
Lines will be searching high and low for business, and so shippers should focus on forcing carriers to expand service offerings rather than just driving down rates. Give the lines something to live on, and in return expect things you never got from them before.
Perhaps better cargo visibility, faster turnaround times through dedicated terminals, faster transit times on door-to-door moves. There should be slack in the system, after all, given the falloffs in volume. Put that to good use.
And it's not just lines that are scrambling for business. The ports of Long Beach and Los Angeles, which have seen cargo volumes drop consistently the past 17 months, are basically holding up cardboard signs saying 'Will discount for cargo.'
Both have seen their projections of volume growth in 2010 evaporate, and so both have passed discount measures to induce intermodal cargo to come to Southern California instead of Prince Rupert, the Pacific Northwest or Oakland. It's gotten that tough.
In the meantime, carriers are looking at more and more audacious plans to avoid costs. CMA CGM told American Shipper in mid-February that it was routing the return leg of an Asia/Caribbean service eastbound around the tip of Africa to avoid paying the transit tolls of the Panama Canal twice. ComPairData in March unearthed the fact that MSC was routing an Asia/Europe service around Africa in both directions to avoid the Suez Canals tolls.
Not only do these moves show the innovative desperation the current situation is necessitating, they might just open up whole new markets.
For instance, with three carriers or carrier alliances routing services around the Cape of Good Hope, all of a sudden, a lot of big ships are passing by Durban and Cape Town in South Africa. Where South Africa was once considered at the end of the world, it might all of a sudden be on a trunk line, at least for a short period.
It is indeed a new world.