Sharks in the Water

Where have you heard this before? This unbiased analysis appeared in the October 24th issue of “LOGISTICS & TRANSPORTATION”, and it just had to be brought to your attention:

“Blood In The Water: Shipping Lines’ Price War Rages On –

“Container-shipping lines are trying once again to boost freight rates. At the same time, they continue to wage the price war that has scuttled all previous attempts.

“If the carriers are to be believed, shippers in the trades from Asia to North America will have to pay an extra $ 400 per 40-foot container come November 15. An equivalent action has been announced for routes from Asia to Europe. Whether these increases will come to pass, however, is another question entirely.

“The latest general rate increase (G.R.I.) recommended by trans-Pacific carriers is identical to the one that was supposed to take place on July 1 of this year. That action fizzled out, however, thanks to the introduction of additional vessel capacity, a move that has kept supply ahead of demand in the major trades.

“Carriers are building ever-larger ships, which are supposed to reduce operating costs, yet end up with flooding the market with excess containers. Then the lines offer steep discounts to attract whatever business they can. In the process, low spot-market rates cause shippers to walk away from contracts that they signed with carriers earlier in the year. And the downward spiral continues.

“Expect more of the same for the rest of this year and into 2014. ‘We believe that freight-rate volatility will continue to characterize the shipping market for some years to come,’ said Philip Damas, a director with Drewry Shipping Consultants Ltd.

“Rates in the trade from Hong Kong to the U.S. West Coast are at a 2-year low, according to Drewry research manager Martin Dixon … The end of 2011 marked the last price war, which only abated when carriers began taking ships out of service in order to correct the yawning imbalance between supply and demand. Rates consequently rose in the first half of 2012, but took another dive in the second half as carriers added new capacity.

“The coming of the new big ships touched off another flurry of discounts this year, particularly in the Asia-Europe trade. Following a temporary lull, the price war has reignited in recent weeks.

“‘Overcapacity continues to haunt the shipping lines,’ said Dixon, ‘and troubles are deepening as more vessels come onto the water.’

“Drewry believes at least some of the G.R.I.s will stick, but only if carriers undermine their actions by adding large amounts of capacity to the inactive fleet.

“In any case, Dixon said, ships removed from service in November will return in December, as the lines look to capitalize on an expected increase in business just prior to Chinese New Year, which begins January 31.

“By the end of this year, notes Drewry, the global container trades will have absorbed another 1.5 million TEUs of capacity, an increase of around 6.8 percent. Demand, meanwhile, will have grown at just half that rate.

“For 2014, Drewry is predicting ‘modest’ rate increases of around 3 percent on the major East-West trades, and just 1.5 percent on North-South routes. Continuing pricing pressures will hold the global average to 1.5 percent, Drewry said.

“That relatively benign outlook masks huge short-term volatility, however. Drewry says shippers should maintain vigilance in the face of continuing supply and demand instability. ‘Making the wrong carrier or contract commitments could result in service disruption or unilateral contract terminations, Drewry said.

“One big source of uncertainty is the P3 Global Alliance, a new space-sharing agreement among the world’s three largest container lines: Maersk, CMA-CGM and Mediterranean Shipping Company. Subject to regulatory approval, the alliance is due to get underway in May of 2104, covering all of the major East-West trades. Together the three carriers represent some 255 ships and 2.5 million TEUs of capacity – enough to command more than a 40-percent major share in some trades.

“Federal Maritime Commission chairman Mario Cordero has asked his regulatory counterparts in the European Union and China to join in a summit that would examine the potential competitive impact of the Alliance. But Drewry doesn’t believe the group poses a threat to shippers. Damas said regulators will likely maintain ‘intense scrutiny’ of the proposed arrangement. And barring possible service reductions in some areas it shouldn’t lead to an increase in rate freights.” –

Did you get that? “Drewry doesn’t believe the group poses a threat to shippers.”

It’s hard to believe that they can’t see the real reason(s) for that unholy alliance.

For one thing, an attempt to corner the market like that by giant corporations in the U.S. wouldn’t get by the Federal Trade Commission. Those three carriers have two thoughts in mind: first, drive the little guys out of business. And secondly, with them out of the way the big boys can raise freight rates to the world’s consumers.

It’s what they call a monopoly, and monopolies are always harmful. This one will backfire though because the world economy is in free fall. Even Drewry points it out. That “yawning imbalance between supply and demand” will leave those giants with “terminated contracts” and empty ships.
The only salvation then will be smaller ships, lower costs and smaller, local container terminals.

“Greed, stupidity and selfishness…”, our young friend reminded us last week. Serves ’em right.