Ocean shipping: Has Opportunity Set Sail?
With 2009 now judged as "a wash," liner execs are banking on a 2010 rebound. The good news for U.S. shippers is that there's still leverage in contract negotiations, more balance in the trade, and less seaport congestion—but for how long will the opportunity last?
Patrick Burnson -- Logistics Management, 6/1/2009
By midyear, maritime and trade analysts expect the U.S. International Trade in Goods and Services report to confirm what many ocean carrier executives suspect: A sluggish recovery in the global movement of containerized cargo will not take place until 2010.
The report, issued by the Department of Commerce's U.S. Census Bureau and the Bureau of Economic Analysis, notes so far that U.S. exports of goods and services decreased by 2.4 percent year-to-date and $123.6 billion, while imports declined 1.0 percent to $151.2 billion over the same period.
The good news for U.S. shippers is that there's more balance in the trade and less seaport congestion. Containers and chassis are easier to locate, and shippers have more leverage in contract negotiations. Meanwhile, carriers are rearranging their fleets and deployment cycles to mitigate further losses.
All of which raises the question: Has the "Wal-martization" effect taken over containerized shipping? Many industry analysts think so, and an alarming new report suggests that a focus on cost alone may spell doom for some carriers. While the past six months have seen a huge amount of capacity changes in the industry, ocean rates continue to plummet while the industry shirks the painful decisions that are needed to ensure their collective survival.
"Titanic" analogy
According to Neil Dekker, analyst for London-based Drewry Shipping Consultants, "The old analogy about 'rearranging the deckchairs on the Titanic' is in fact a good one for the crisis the liner industry finds itself in today."
In his report Capacity Management/Surviving the container crisis, Dekker and other analysts for Drewry examine how carriers have reacted to the global economic crisis and what steps will need to be taken if they are to survive. So far, say analysts, carriers have been altering capacity via service suspensions, slow steaming, service deviations, and lay-ups.
"If we think of that grand liner as the market—proud, overconfident, and heading towards a catastrophe partly of its own making—then we can see the operators desperately rearranging their fleets, while refusing to acknowledge the necessity of abandoning ship—or ships—before the crisis becomes a disaster," says Dekker.
Other maritime analysts say that much of this behavior can be blamed on trends established by the big box stores like Wal-Mart, which emphasize cost-cutting above all else. "And there comes a time when all the value is priced out of that equation," says a San Francisco-based industry consultant. "Nothing is left but space and a price point that can't get much lower."
While some of these strategies are more effective than others, says the Drewry report, few if any carriers have yet adopted the full suite of measures consistently—and there is still reluctance on a collective front to tackle the dire situation head-on. Drewry also argues that the operators who move the fastest and are the most radical in their strategies will be best placed for recovery in the long term.
"We still expect some major operators to fail this year," declares Dekker. "Without a doubt, scrapping and wholesale cancellation of the container orderbook are the two most effective tools of capacity management." He notes that while scrapping has increased significantly since late last year, it will not alter the fleet enough to make a real difference and carriers will not start sending ships younger than 20 years to the scrap yards.
"Carriers now have to swallow some very unpalatable truths as the global recession subverts conventional wisdom, and the degree to which they have signed up to the cost-cutting agenda has been rather patchy," adds Dekker.
New consolidation
Maersk and CMA CGM—two of the three largest carriers—are ahead of the curve when it comes to consolidating resources. With at least nine joint vessel sharing and cross slot purchasing agreements set up to cover the big east/west container trade lanes now in place, analysts suggest that yet more changes will be underway this summer.
Just last April, shippers witnessed the creation of half a dozen new vessel sharing agreements between Maersk and CMA CGM, with carrier officials saying that yet more will follow on the major east/west trades. Notably, a series of contracts covering the Asia-Mediterranean and Asia-United States East and West coast routes comprises one of the most recent additions to the Maersk/CMA CGM alliance.
For carriers, this represents a way to differentiate services until freight rates are restored and demand strengthened. For shippers, though, it's still a zero sum game in many respects. The new agreements do not alter the fact that there's still too much capacity in the trade lanes. Between the two lines, more than 35,000 TEUs (twenty-equivalent units) of weekly capacity is available for shipments once an economic recovery gets underway
Meanwhile Zim Integrated Shipping Services has joined the Grand Alliance on the Asia-Europe, Asia-Mediterranean and Asia-U.S. trades. The establishment last spring of a new Zim/Grand Alliance joint service on the South China Express service, initially operated by the Grand Alliance lines, now comes under a new vessel sharing agreement between the two groups.
On the Asia-Europe trade, Zim has also taken slots on two Grand Alliance east/west services, and most recently, upgraded its own Asia-Mediterranean service commitment through a further slot deal with the Grand Alliance to cover the central and western Mediterranean using the alliance's Europe-Mediterranean Loop M.
Panama Canal incentive
Despite earlier signals of an economic rebound, the Panama Canal Authority is giving carriers a break on rates through the summer. Panama Canal Authority (ACP) has announced a temporary plan that will provide short-term cost reduction and greater flexibility to its Reservation System. The temporary measures, designed to help mitigate the impact of the economic crisis on the Canal's clients, were approved by the ACP board of directors in late March.
The result of informal consultations with clients, the temporary measures will take effect June 1, 2009 and continue through September 30, 2009. The two primary components comprise a redefinition of ballast (ships without cargo) for full container vessels transiting the Canal along with modifications to the reservation system to increase flexibility and reduce fees.
Alberto Alemán Zubieta, administrator and CEO of ACP says carriers may soon see some light at the end of the tunnel. "Our economic advisors are studying trends pointing to an uptick in shipping," he says. "Our findings suggest a recovery at the end of 2009 or early 2010."
And while the latest news does not directly contradict that observation, it indicates that business is still lagging behind a bullish forecast. Carriers will now have 30 days before the date of a vessel's transit to request slot substitutions without additional costs. Previously, carriers could make such requests without an additional charge if that request was made at least 60 days prior to the date of transit. This temporary measure grants shipping lines more flexibility for slot substitutions, allowing them to replace one vessel for another with similar dimensions.
Meanwhile, the base reservation price is being reduced depending on the vessel size for all segments that use the ACP's Reservation System. For example, the base reservation price for a super vessel, with a beam greater than or equal to 100 feet and a length greater than or equal to 900 feet, is reduced by $5,000 per transit.
Up until recently, when vessels failed to arrive on schedule, they lost their slot, but had the option to pay an additional charge to keep the reservation and transit that same day. The new temporary measure reduces the charges and provides shipping lines with greater flexibility. The percentage reduction varies depending on the vessel's arrival time.
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