Lay-ups and Lay-offs

On March 16th, InfoMARE reported: “Lloyd’s List Intelligence expects inactive box ship capacity to hit 1m teu”.

Note that it was a report, and not a prediction. The day before, on the 15th, we saw this headline in e-Cargonews Asia: “About 800,000 TEUs idled, says Maersk”. The story read as follows:

“Global maritime firms are starting to take container ships out of operation as fuel prices and falling freight rates erode profits, the head of industry leader Maersk Line said, reported Reuters.

“Around 5 percent of the global shipping capacity, or 800,000 TEUs, are in lay up, an industry term for taking ships out of action, said Soren Skou at Maersk’s Singapore offices on his first overseas trip as CEO.

“That figure could soon increase to more than one million TEUs, a level not seen since 2009 when trade was severely hit by the financial crisis, he added.

“Firms only usually take a vessel out of service when it is no longer profitable to operate on a daily basis. It is a last-resort measure but many shipping companies are struggling for a fourth year, hit by overcapacity, weak demand for cargo, high bunker fuel prices and depressed freight rates.

“‘We do not have any lay up ships at this point. But we are certainly not ruling out laying up ships over the summer if the market is growing less than what we expected,’ Skou told reporters.

“The world’s largest container firm, a unit of Danish shipping and oil group A.P. Moller-Maersk, last month reported a net loss of $ 504.59 million in 2011, and has forecast more losses in 2012.

“Skou, who became CEO two months ago, reiterated the firm’s main mission was to restore profitability and reduce market overcapacity by adjusting its fleet and reducing the speed of vessels.

“‘As an industry, we have been investing ahead of demand. As demand has been slowing down, we do expect to have a situation with excess capacity over the coming years,’ he said.

“‘We have to invest less. We have to stop trying to outgrow each other, building bigger and bigger ships’ …

“The firm has already removed 9.5 percent of its Asia-Europe capacity and has decided against ordering 10 more Triple-E vessels, the world’s largest container ships, to add to its current fleet of 20. Despite the cuts, Maersk Line maintains its dominant 15.5 percent share of the container market.

“Maersk has the flexibility to reduce its global capacity by a further nine percent as the contracts for one-fifth of its chartered vessels are due to expire this year, Skou said.

“Maersk Line forecast container demand to slow between five and eight percent in the next few years compared to an average of 10 to 11 percent over the past 25 years as Western economies weaken, manufacturing activity in Asia slows, and products become smaller in size.

“Skou said the company does not have any acquisition plans and does not believe there will be much more consolidation in the industry in the near term.” –

Here’s how we see it. Mr. Skou was elevated to CEO because his predecessor saw the writing on the wall and didn’t want to be sitting in the driver’s seat when everything crashed. And everything will crash. Take it to the bank.

Folks in charge of maritime operations are inclined to blame “rising fuel prices” and “falling rates” for the staggering losses in what was once the most profitable industry on the planet. The several ways those geniuses chose to reverse the losses, however, included raising the costs to consumers and “slow steaming”. With strategies like those, is it any wonder why industry losses are careening downhill?

Any merchant – at any level – will tell you that the only sure-fire ways to entice a customer to buy your goods would be to reduce rates, not raise them, and to provide better and faster services, not “slow-steaming”. What’s so hard about that to understand? Could it be that the easy sledding of the industry in recent years is what attracted complacent and dim-witted people, and that the “corporate fanning of feathers” was all that mattered to them? There’s little doubt that the call for those so-called “Triple-E” type vessels has been prompted by such egoism and not by rational thinking.

And we’re not just picking on Maersk and Mr. Skou. On March 12 Bloomberg Businessweek revealed that Orient Overseas (International) Ltd., operator of Hong Kong’s biggest container line, posted a 90 percent decline in profit in 2011 because of industry-wide overcapacity, falling rates and higher fuel costs. This year is unlikely to be better, the company said, because of an expected increase in new ship deliveries and slow economic growth in Europe and North America.

But according to CFO Kenneth Cambie, Orient Overseas is confident it can boost rates even further on its Europe and America routes later this year. “I am not too excited about the increase in freight rates, given the increases of operating costs driven by cost of fuel,” he said. The company will focus on using larger vessels and improve operational efficiency to cope with rising fuel costs, Cambi said. And you know what he means by improving “operational efficiency”. Right. Slow steaming.

In all fairness to those carrier moguls, though, we need to acknowledge their reliance upon the advice by those the media refers to as “industry analysts”. These hair-brained “analysts” are responsible for most of the stupid moves high-priced liner officials have been making. Just last week Shipping News quoted SEANTEL Maritime Analysis as stating that “the cost of the recent carrier price war from mid-2010 to 2012 was $ 11.4 billion, enough to fund 18 space missions.”

Space-missions? With world economies collapsing, and with folks wondering where their next meal will come from, those gurus – those advisers to maritime CEOs and CFOs – can show concern only for the lack of funding for wasteful space missions? Yes. As we said – everything will crash.