Carriers: A mystery wrapped in an enigma

Carriers: A mystery wrapped in an enigma    On Wednesday, ESPN reported that Kansas City Chiefs quarterback Matt Cassell had an appendectomy. Mid-way through the report, ESPN quoted Chiefs head coach Todd Haley as saying Cassell was out with an 'illness' and that he wasn't ready to rule out Cassell for this weekend's key matchup with the San Diego Chargers.
   That upheld a long tradition in North America's tough-guy sports of hiding injuries to keep upcoming opponents guessing. In the NHL, the same thing happens all the time. Kansas City was surely hoping word of Cassell's surgery (sorry, 'illness') wouldn't get out and that San Diego would waste much of its week planning to stop him.
   Yet the strategy of posturing publicly isn't confined to the gridiron or ice rink. It's also visible on the seven seas, where carriers often say one thing and mean another. Let me explain.
   Following a year in which carriers were lauded by analysts (American Shipper affiliate ComPair Data included) for reining in capacity and not scrounging for market share, this winter virtually no carrier has taken any significant capacity out of its networks for any period of time.
   For example:
   ' The CKYH Alliance of COSCO Container Lines, 'K' Line, Yang Ming and Hanjin Shipping, rather than suspending entire services on the Asia/Europe trade as it has done in the past few winters, merely deleted a single sailing from four Asia/Europe loops this year.
   ' The Grand Alliance of Hapag-Lloyd, NYK Container Line and OOCL, which for the past two years has merged one of its Asia/U.S. East Coast all-water services with a similar one from the New World Alliance (APL, Hyundai Merchant and MOL), will instead merely skip a sailing on the service and slow it down.
   ' Maersk Line suspended its AE9 Asia/Europe service in mid-October, but then said this week it will bring back the service in mid-December, albeit with a rearranged rotation that's heavy on transshipment hubs and focuses on speedy westbound transit times.
   In the meantime, rates on both the transpacific and Asia/Europe lanes have been steadily slipping though the latter months of 2010, according to the various spot rate indexes out there. Now, of course, spot rates are hardly an infallible point by which to measure. But as Phillip Damas, division director for Drewry Shipping Consultants, said recently, beneficial cargo owners 'really try to benchmark their contract rates against spot market rates.'
   Recent data from liner carrier APL corroborates the idea that rate levels are dropping. The line said its average rates from mid-October through mid-November were about 12 percent lower than those from mid-July through mid-August.
   In the midst of all of this, a few notable carriers have publicly outlined their rate increase plans for 2011, as have the leaders of the key discussion agreement on the transpacific.
   CMA CGM is raising rates by $250 per TEU from Asia to Europe and $400 per TEU from Asia to Latin America. On Thursday, Hanjin laid out its Asia/Europe tiered rate increase plan, which amounts to $900 per TEU by September. Earlier, MSC announced increases of $300 per TEU and Zim $250 per TEU from Asia to Europe.
   The Transpacific Stabilization Agreement (TSA), which represents 15 of the biggest carriers on the transpacific, said in November it is seeking revenue increases of $400 to $500 per TEU in 2011 — split between rate increases of $200 to $300 per TEU in base rates and a $200 peak season surcharge starting in June.
   Meanwhile, CMA CGM (a TSA member) in early December said it would assess a weighty 'peak season surcharge' of $320 to $510 on eastbound transpacific shipments from Jan. 1. The line didn't respond to a request for comment from American Shipper about how Jan. 1 could be considered the start of the peak season on the transpacific head-haul.
   Here's the thing, though, according to maritime news service Alphaliner, scores of new vessels have entered the global liner fleet in the second half of 2010, while vessel scrapping levels have been dramatically reduced from the record levels seen in 2009.
   So we have the global container fleet rising, rates dropping, and carriers seemingly unwilling to take the drastic capacity management measures they did to such successful effect in early 2010. Yet the sound bites all year from industry leaders have centered around the idea that lessons have been learned, that they will seek profits, not market share, etc.
   So is capacity management at the turn of 2011 the carrier's industry's 'appendectomy' classified publicly as a mere 'illness?'
   If the industry is, indeed, unwilling to commit to the capacity management measures they undertook in late 2009 (withdrawing loops and idling ships), then that means carriers are depending on one or two things: more prevalent use of slow steaming, and/or a significant demand recovery in 2011.
   Let's look at how those expectations might shake out. First off, slow steaming. As Alphaliner said in early December, there is only so much further capacity that can be absorbed by slow steaming, or even extra-slow steaming. It said that if extra-slow steaming (which absorbs an additional vessel or two on each long-haul string) were adopted in every applicable loop globally, it could soak up another 350,000 TEUs of capacity, bringing the total soaked up by extra slow steaming to about 1 million TEUs.
   That's equivalent to roughly 2 percent to 3 percent of the current global container fleet.
   As for demand, most forecasts have global container volume rising in the 6 percent to 8 percent range in 2011. That's promising, but remember that the volume gains made globally in 2010 really just brought things back to the levels they were at in mid-2008. Adding 6 percent to 8 percent on top of that merely brings carriers to the levels they would have been expecting for 2009 in mid-2008.
   Which brings us back to the initial point. Smokescreens versus reality. Carriers know what they are doing — how else to explain their wild profitability in 2010 despite a year that was no better, demand-wise, than 2008. Costs have been trimmed and networks reshaped. It's just hard to tell where the carrier industry is collectively going, and maybe that's the point.
   While shippers worry about sizable rate increases next year, and peak season surcharges in January, and about vessel overcapacity or undercapacity, and how to permanently incorporate slow steaming into their supply chains, carriers are, well, carrying on. Having turned their back on 2009, and prospered in 2010, it's now about consolidating the gains they’ve made.
   And playing the mystery game (appendectomy or illness?) keeps everyone guessing. Even the ESPNs of the shipping media. ' Eric Johnson