Restocking or recovery?
We've been hearing for months now that any positive container demand blip on the radar is due to retailers in North America and Europe restocking inventory and not because of increased consumer demand.
It's not just carriers, but also some analysts, who insist that the relatively robust container volumes we've seen in the first third of 2010 is primarily due to retailers playing catch-up.
'China's export numbers in February 2010 were higher than in January 2008,' Mathjis Slangen, senior analyst for cargo at consultancy Seabury, said in mid-April. 'Is it a restocking phase? There was massive growth in Chinese manufacturing levels from December through February, but it flattened out by March. This, to me, shows the volume growth in these months was predominantly restocking. I don't see a clear sign manufacturing is increasing.'
Hanjin Shipping Chief Executive Kim Young-min, who in January also took over the rotating chairmanship of the Transpacific Stabilization Agreement, said restocking was the main driver for the pre-Chinese New Year's surge in container volume. Maersk Line executives have expounded on that point numerous times this year, as have a number of other lines who urged caution even as their early 2010 numbers look promising.
Yet not everyone is convinced.
'A lot of people were saying the surge in demand was just people filling up their depleted stock, but that's not true anymore,' Bruno Sidler, CEVA Logistics chief operating officer, told IFW in late April. 'We really see genuine demand, especially in the high-tech sector. This is not just stock that is going in warehouses, these are programs where we ship directly to the customer ' this is stuff that is sold. It really seems that there is definitely something starting to happen, maybe not a full-steam recovery, but there is something there.'
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| Sidler |
Sidler's view was backed by U.S. consumer spending figures in March, which hit a level not seen since November 2007 ' in other words, just prior to the subprime mortgage-induced financial meltdown.
Shippers, as well as Sidler, cynically suggest that carriers are downplaying the strength of the recovery because that position gives lines the ability to suppress capacity. That may well be true, but really, who can blame lines for being outwardly cautious even if they feel more internally optimistic.
If there's no proof of collusion, there's nothing wrong with carriers individually withholding capacity. It's their ships and they can do whatever they want with them. And if it suits them to say that a recovery is truly not taking place, then so be it. It's not illegal to incorrectly predict the future.
The more pertinent question going forward is whether the current volume growth ' whether it's restocking or recovery ' can be sustained until demand truly does return beyond doubt. The French line CMA CGM said in early May its Asia/Europe volume was 30 percent higher in early 2010. Of course, comparisons to early 2009 can be dangerous, but if the lines can mostly bridge the gap between the restocking surge and the second half peak season with such huge volume increases (not to mention higher rates), the argument about restocking or recovery may eventually be moot.
And there's little evidence to suggest that lines won't redeploy their capacity when demand does return. It may be good for them to suppress capacity for the short term, but in the long term, they are in the business of owning or renting ships and moving containers.
A thankless mandate
At a recent liner shipping event in London, I had an interesting discussion with an executive from one of Europe's biggest container ports about large container vessels.
He asked a simple question: What, exactly, are port authorities getting out of bigger ships?
While carriers get slot cost benefits, ports have to dredge, secure ship-to-shore container cranes, and build up their yards to handle vessels that unload a lot of cargo very quickly.
For instance, for carriers operating on the Far East/Europe lane, a fully loaded 13,000-TEU ship offers carriers cost savings of 18 percent over an 8,500-TEU ship and 27 percent over a 6,500-TEU ship, according to Philippe Hoelinger, vice president of SeaAxis.
But port authorities that have little choice but to equip themselves for the larger ships are stuck with the bills for the projects to accommodate the new leviathans. One might argue that larger ships provide ports with greater opportunity to increase volume (and thus revenue, through tariffs). But it's undeniable that larger ships are placing a strain on ports.
The Port of Long Beach, for instance, has long seen the need to replace the Gerald Desmond Bridge, not just because it's considered insufficient to handle future truck traffic, but also because it's too low to allow the world's biggest ships to pass underneath.
Here's another example: the Port of Savannah has secured nearly $270 million in state funding and bonds (and will seek another $100 million from federal sources) to dredge the river leading to its massive Garden City Container Terminal so that a larger class of containerships can call the terminal.
The dredging is key to unlocking potential growth in container volume made possible once the Panama Canal expansion is finished in 2014.
And it's not just the biggest ports and biggest ships that are affected. Mid-size ships are being cascaded into niche trades and calling at smaller ports that must also upgrade. With the size of feeder vessels growing, ports that might have only handled 700- to 1,000-TEU ships must now equip themselves for vessels twice those sizes.
In the end there's not a lot port authorities can do except do what must be done. If they fail to accommodate the larger vessels, carriers will use other ports, especially in competitive markets like Europe or the U.S. East Coast.
Like airports that have an unfunded mandate to upgrade to handle the Airbus A380, ports will silently adapt to a new supersized world, without sharing many of the spoils.
In fact it reminds me of the arms race sports teams get involved in to win championships. To get to the top, teams must spend significant amounts of money. Without spending, they have no chance. But spending significant amounts of money doesn't guarantee a trophy.
Ports face the same issue. They have to spend because there's not really an option not to spend. But there's no guarantee that spending will result in success.