A 2010 recap
As the calendar sweeps gently into 2011, there's always a dilemma for shippers and carriers over whether to look back in anger or look ahead with hope.
There's plenty discussion in this issue on what form liner carrier-shipper relations might take in 2011 (see 'Attention to detail, pages 6-13), so let's briefly look back at a few touchstone issues from 2010.
' Carriers withholding capacity. Depending on which side of the fence you fall, you either viewed carriers' actions in early 2010 as showing the capacity management discipline they lacked in previous years, or as an egregious attempt to manipulate the market to drive up rates.
As Philip Damas, division director of Drewry Supply Chain Consultants, put it: 'Capacity came back after demand came back. Carriers learned that you let demand increase, then you increase capacity.'
Whichever explanation you believe, it did lead to a vicious cycle of carriers being unable to meet demand, which led shippers to make multiple bookings to ensure space, which led to no-shows. Not good any way you look at it.
George Goldman, vice president of South China for APL, argued that the return of idled vessels in early 2010 threw carriers' networks out of whack, contributing mightily to the space shortage.
'When idled ships were put back into service, they weren't all the same size, so we had to cobble together some services with different size ships,' Goldman said. 'On the other hand, there were misleading forecasts, purchase orders that didn't show up, and purchase orders showing up that weren't expected.'
By fall, the capacity situation was largely sorted out.
'Transpacific capacity is now what it was in 2008,' said APL President Eng Aik Meng. 'Utilization in the last four months is pretty healthy ' 90 percent or so.'
His comment on transpacific capacity is largely corroborated by analysis from American Shipper research affiliate ComPair Data. Both ComPair Data's October World Liner Supply report and a special report on ocean carrier capacity management show such a development. (The ComPair Data report, Taming Cyclical Rates: Have ocean carriers found the key to reining in the boom-and-bust cycle?, is available at www.ComPairData.com/reports).
' Ocean carriers have been too quick to order new vessels. APL, Evergreen and Hamburg S'd all made orders in the summer, while Maersk is rumored to be negotiating a massive $4 billion order for 20 18,000-TEUs vessels (which it denied to American Shipper).
Eng justified the orders by saying a situation of oversupply can quickly turn to undersupply.
'The supply side is overstated,' Eng said, explaining that while currently ordered ships were due to be delivered industry-wide in bunches, because of order delays, deliveries will be spaced more evenly over the next couple of years. 'Capacity growth is forecast at less than 10 percent the next two years. The question is whether in 2013 there will be enough ships to meet forecast demand.'
The maritime news service Alphaliner reported in mid-November that even if the present levels of ordering interest were to be maintained, it wouldn't represent too much ordered capacity on a historic basis.
'Since the order book peaked at 6.89 million TEUs in August 2008, it has been in continuous decline due to a combination of poor market sentiment and a lack of access to funding,' Alphaliner said. 'Although the order book will not return to the heady levels of 2007, when it reached a peak of 64 percent of the fleet, its size is expected to remain in the 25-30 percent range next year.'
That's not really too much. Philippe Hoelinger, vice president of SeaAxis, said in April that historically, the minimum ratio of ordered to existing capacity is 20 percent (see 'Analysts: Ship orders to begin anew in '11,' at www.AmericanShipper.com/links).
' Rate volatility. If there really were lessons learned by carriers in 2009, it seems shippers did most of the learning in 2010.
Carriers stuck to their guns come contract negotiation time and, in the words of one carrier, were 'more obstinate and more immovable on price points.' Coupled with peak season surcharges on major trade lanes, it was a difficult year for ocean transport procurement executives.
'You don't want to be the hero from May to December and the goat from January to April,' said Edwin Coseteng, stream managing director for IDS Logistics, a unit of the Hong Kong-based sourcing giant Li & Fung.
The problem appears to be that carriers want to price their contract rates in one manner (incorporating their service ability and relationships) while beneficial cargo owners 'really try to benchmark their rates against spot market rates,' Damas said.
Stephen Ng, director of corporate planning for OOCL, said rate volatility would continue unless carriers are afforded some level of cooperative engagement, another hot topic in 2010.
'During the worst of the downturn, we heard a lot from customers about the importance of rate stability, especially last year when rates were below costs,' Ng said. 'We have conducted some internal research at OOCL to examine the standard deviation of rates before EU deregulation in 2008, when the EU took away exemption for price discussion from the liner shipping industry. We took the Asia/Europe and transpacific trades as examples.
'During the period before 2008, there was slightly less rate stability in Asia/Europe, with its standard deviation being 1.2 times that of the transpacific. Since October 2008, the volatility in Asia/Europe has become much higher ' 2.5 times that of the transpacific eastbound. When standard deviation has been higher, rate stability has been less. When things are left to the free market, people tend to overreact.'
What shippers want, aside from service consistency and good rates, is the knowledge that carriers are making their decisions individually, as Peter Friedmann, executive director of the Agriculture Transportation Coalition, told American Shipper in November ('Friedmann: Expect scaled-back antitrust bill in new Congress,' at www.AmericanShipper.com/links).
'As a general rule, shippers and AgTC didn't voice complaints about Maersk,' which several years back all but pulled out of serving U.S. inland points, he said. 'That was an individual company making an individual decision based on economic factors. Nobody is expecting a carrier to provide a service that doesn't make sense economically.'
Narrowing the spectrum of rate volatility may eventually come down to carriers knowing exactly where their profits lie, on a micro level.
'I know what the cost is to move every box, all the fixed costs and the variable costs,' Eng said. 'We are very clear on this.'