Supply without Demand

A few weeks ago, Robert Wright wrote in the Financial Times:

“The world’s three largest container shipping lines are to launch an unprecedented co-operation effort on transpacific services. The aim is to reduce their exposure to stagnant US demand while continuing to serve a wide range of ports.

“The announcement of the initiative by Maersk Line, the largest line, Mediterranean Shipping Company, the number two, and CMA CGM is the latest sign of how the US economic slowdown is affecting container shipping. AP Moeller-Maersk, Maersk Line’s parent, is expected to announce on Thursday that it saw double-digit percentage point falls in volumes between Asia and North America last year.

“Container lines – which carry finished or semi-finished goods – are particularly sensitive to housing sector demand on routes to the US because a high proportion of the route’s cargo is Asian-made furniture …”

“The initiative would allow the three lines to rationalise existing transpacific services to the US west coast, while providing customers with extensive port coverage in China, Japan and Korea, the lines said. They did not reveal how much capacity they would withdraw.

“The co-operation will surprise some because Maersk, MSC and CMA-CGM, and Taiwan’s Evergreen, owner of the world’s fourth largest shipping fleet, have previously preferred to stay outside alliances.”

Actually, Mr. Wright, this Vessel Sharing Agreement – this “co-operation” – comes as a surprise to many, many folks, not to just “some”. Even though officials in U.S. ports speak to the media and U.S. consumers as though everything is just hunky-dory with the industry, they’re just pretending. They know all about the nation’s economic miseries. If they say otherwise, however, then they won’t be able to beat their drums – and their gums – for the billions they hope to acquire to finance their pet projects, such as dredging, berth expansion, giant container cranes, and bridge and highway replacement projects. And because the expanded Panama Canal, you see, will be directing hundreds of enormous container ships with millions and millions of TEUs to our dredged ports and enlarged terminals, well, naturally, consumers will just rush right out and purchase those goods.

It’s a fascinating new economic theory called “supply without demand”. It’s pretentious nonsense, that’s what it is. In an earlier commentary, “A Hasty Courtship” (Vol. XIV, Art. 37), we wrote:

“Much is being said about the difficult time carriers are having filling these vessels, however. One of Maersk’s recent CEOs admitted that in order to sustain acceptable freight rate levels carriers must now reach 90% or more ship utilization, a far cry from the 75% to 80% break-even level of pre-mega-ship days. That figure rises to 100% in peak seasons, he added.

“With the economic downturn of late, extended periods of time at loading berths are now required in order for mega-ships to attain break-even levels … and time is money. And too much ship means too much money. So much money, in fact, that a $ 568 million loss was incurred by Maersk in 2006 and many thousands of employees were terminated.

“Even the unthinkable has taken place. Vessel Sharing Agreements, that is, partnering with despised rivals, have now become a fact of life. It’s either that, or mothballs for the idolized mega-ships.

“Well, why mothballs? Because these inflexible goliaths can perform only limited services, that’s why. Three years ago, Katherine Yung of the Dallas Morning News reviewed these limitations. She wrote that these giants;
• could only be berthed during daylight hours and when the wind falls below 10 knots;
• require four to five days to offload, instead of two or three;
• require larger, more expensive cranes than those found in most ports;
• consume twenty tons more of fuel each day than the next biggest carrier;
• require longer berths than those available in most ports;
• force railroads to make costly adjustments in equipment and personnel;
• can service only three U.S. ports — Long Beach, Oakland and Seattle;
— and if, “In the next few years, all these ports will be overrun by these ships,” she warned, enormous amounts of taxpayer funding will be required for dredging, berth expansion, equipment upgrading, bridge and highway replacement projects, and so on and so forth.

And with respect to those unacknowledged Vessel Sharing Agreements that are being publicized in international maritime journals, in Vol. XV, Art. 14 (Slow Boats from China), we commented:

“The new vessel sharing agreements between erstwhile rival carriers are being mentioned almost daily in maritime journals, and although this hand-holding comes as a surprise to some, cautious international observers and consultants warned that aggressive construction of mega-ships would inevitably lead to over-capacity and pressing financial conditions for carriers. A time would come, those observers predicted, when giant vessels would take too much time to load and offload … would take too much time to maneuver into ports and tie up at typically small berths … would disrupt the sailing schedules of waiting mega-ships … and would be forced to deliver cargo miles and miles from intended destinations. But the race was on and there was no turning back. The ‘corporate fanning of feathers’ was all that mattered.

“But money matters even more. As though the cost of operating awkward mega-ships wasn’t enough of a burden, rapidly rising fuel prices may prove to be the last straw. Only one stop-gap measure remained in carriers’ efforts to keep mega-ship operation from being an unmitigated disaster, and that step takes away one of the perceived advantages of ‘economies of scale’. In discussing this last ditch measure, an official admitted that by cutting his mega-ship’s speed from 25 knots to 20 knots, fuel consumption could be reduced by up to 50%. But wait a minute. Wasn’t the increased speed of a mega-ship supposed to be what provided significant ‘economies of scale’ benefits?”

“[Are those mothballs we smell?]”