When perception affects reality

   In mid-February, Maersk Line announced it was pulling 9 percent of its Asia-Mediterranean capacity from the end of March through a reshuffling of its joint Asia-Med service network with CMA CGM.
   That announcement, coming as it did on the heels of Maersk’s confirmation that it would be pulling one of its seven Asia-Northern Europe services at around the same time, constituted the first notable bit of contraction on the beleaguered Asia-Europe trade.
   So capacity was declining. Cue the ticker tape parade for other lines and analysts.
   “Immediate beneficiaries would be liners with large capacity exposures to Asia-Europe, namely Hyundai Merchant Marine, China Shipping, COSCO, Yang Ming Marine, and Evergreen Marine,” Citi analyst Rigan Wong wrote in a note to clients immediately after the announcement.
   On the other hand, box trade analyst Alphaliner noted that “despite the rationalization, the total Far East-Med capacity operated by the two carriers will still increase by around 5,900 TEUs weekly in April, compared to January. The overall capacity on the Far East-Med trade is still expected to increase by 10 percent between January and June 2012.”
   This is not where perception meets reality; it’s where perception affects reality. Four of the Asia-based lines saw their stock prices rise the Monday after Maersk announced its 9 percent capacity withdrawal on Feb. 17. But Maersk was merely announcing it was withdrawing 9 percent of its directly operated capacity, not 9 percent of capacity offered by it and its operating partner.
   Financial markets have long struggled with how to capture value from the container shipping business. And only in the last few years have dedicated analysts at investment banks come to truly understand the industry’s nuances and vagaries. But the financial markets, like with other sectors, are still swayed by headlines and unrefined information.
   Reality tells a story. American Shipper liner research affiliate ComPair Data figures show Asia-Med capacity at the end of February was at virtually the same level as it was at the start of October 2011. That’s like other trades analyzed by ComPair Data, where weekly allocated capacity has either grown or held stable, while the number of ships deployed on the trade has come down.
   In short, that means larger ships are being used. These bigger vessels give carriers the potential of better slot costs, but they are less flexible than smaller ships and can become burdens when utilization levels are not high.
   Removing two 5,000-TEU ships and replacing them with a 10,000-TEU ship changes the operational dynamics for carriers. In times of heady demand, it drastically reduces their costs per container moved. But in times of slow or no demand growth, it gives lines less operational wiggle room.
   In this specific case, Maersk and service partner CMA CGM are reducing the number of planned loops they were to operate on the trade in favor of rotating in larger vessels on the remaining services. Fewer services, larger ships, it’s a trend that cannot be ignored.
   The important thing to remember is that one plus one doesn’t always equal two. Weekly capacity may hardly be affected, but the shape of how that capacity is delivered to the shipper will be.
   Think of it this way. If your family drinks seven gallons of milk per week, is it better for you to buy a fresh gallon every day, or to buy a two-gallon container every other day? So long as there is a reasonable assurance that the store will stock the milk you require every day, there’s little difference. But if the store sells out the day you plan to buy the two-gallon jug, that could throw your cereal-eating and coffee-drinking routine for a loop for a day or two.
   It’s easier for the store to stock less of the larger containers, so the store is happier if you’re buying two-gallon jugs every other day. But there’s less wiggle room for the store and the milk buyer if everyone is buying two-gallon containers.
   What Maersk did is neither good nor bad. The carrier adjusted capacity, which is its right. Supply chain departments largely exist to cope with these changes. The problem comes when markets react, or to put it more correctly, react wrongly to these changes. In most cases, perception doesn’t equal reality.
  
Asia-Europe competitiveness. If you’re looking for a single answer to why Asia-Europe rates fell so sharply in 2011 relative to transpacific rates, the maritime analyst SeaIntel has provided one clue: extreme competition.
   According to SeaIntel analysis, 82 direct port-to-port trades from Asia to Europe are served by 20 or more weekly services. From Asia to North America, only 42 direct port-to-port trades were served by 20 or more products.
   The heaviest degree of competition on any port-to-port trade was from Yantian to Rotterdam, with 93 different products being offered weekly, followed by Shanghai to Rotterdam, at 89 different weekly products.
   On the transpacific, the Shanghai-to-Los Angeles/Long Beach trade had the most competition, with 55 weekly products offered. To put that in context, there were 10 different port-to-port trades on Asia-Europe with more than 55 service options.
   “Whilst the number of weekly products being offered is certainly not the only competitive parameter, these findings might serve as an added explanation as to why the price war turned out to be much more fierce on the Asia-Europe trade lane than on the transpacific trade lane,” SeaIntel said.
   The unspoken element, of course, is the absence of conference or discussion agreement entities on the Asia-Europe trade. If it has taken a while for the true consequences of Europe’s ban on liner conferences to reveal itself, that’s because the years between the repeal in 2008 and now have been rather crazy.
   A February report from the U.S. Federal Maritime Commission suggested the continued presence of the Transpacific Stabilization Agreement may have dampened rate volatility on the transpacific relative to that seen on the Asia-Europe trade (although the report’s larger message was that U.S. shippers have been unharmed by the EU liner conference ban).
   Circumstantial or not — more regulation and more competition have made Asia-Europe a harder place for carriers to make a dollar.