What iron ore tells us about container shipping

What iron ore tells us about container shipping    There's a fascinating power play going on in the steelmaking world right now. The miners of iron ore, a critical component of steel manufacturing, are changing the way they price their product to steelmakers.
   Traditionally, major mining companies, like BHP Billiton and Rio Tinto, have entered into long-term contracts with individual steel producers to supply them iron ore. But increasingly, miners are turning to the spot market to sell their product so as not to leave any money on the table as commodity prices rise around the globe.
   Chinese demand, and Asian demand in general, has put cost pressure on iron ore buyers, and the mining companies are seeking to take full advantage.
   This development got me to thinking about the container shipping industry in a couple different ways. For one, steel is a fundamental raw material in two of the most basic things that make container shipping what it is: vessels and containers. Rising prices and more price volatility for iron ore will translate into rising prices and more price volatility for steel. That in turn will shake up the cost structure for shipbuilders and container manufacturers. The industry saw last year what a shortage of containers can do.
   The other way of thinking is how it pertains to the perennial struggle between shippers and ocean carriers. One can shrug off mining companies turning more to spot rates as emblematic of the way the commodity markets work, and as irrelevant to container shipping. But that ignores the evolutionary way business develops.
   Do many transpacific shippers and carriers enter into annual or long-term contracts? Yes. Do many fear the volatility inherent in spot markets? Yes.
   Transpacific ocean freight contracts still largely rely on annual negotiations and annual terms of service. But who's to say that will remain true in the next five years? Industry fundamentals may change to such an extent that one side or the other chooses to change how things are done, leaving the other side little choice but to follow.
   For instance, imagine if demand for Asian-made goods in North America tapers off to the extent that volume in 2011 stays relatively constant the next five years. Then shippers could argue there is finite demand, leaving carriers to scramble for what cargo there is to fill up their increasingly large and expensive ships. In that scenario would it still be in the shippers' best interest to sign annual contracts, when the ensuing scramble for cargo could drive rates progressively down?
   Or imagine if carriers collectively measure their future shipbuilding efforts to such a degree that space is at a premium, as demand from Asia to North America rises steadily over the next five years. Then wouldn't carriers benefit from using short-term agreements to better capture upward movement of rates?
   The development of container freight rate indexes in recent years seems to suggest there is more, not less, activity and interest in short-term rates.
   The above hypotheticals seem extreme, yet the lesson to be learned is that other, seemingly unrelated industries often provide a clue as to how the container shipping industry might evolve.

NVOs a buffer in no-show debate?
   Non-vessel-operating common carriers have been gradually grabbing market share from liner carriers over the past decade, and the trend gained momentum in 2010.
   But here's a new wrinkle to watch for: in the run-up to spring service contract negotiations, every analyst and industry player I've spoken with has said carriers will want more certainty from shippers in terms of honoring their bookings. That is to say, if shippers expect service guarantees from carriers, carriers want assurances that cargo will show up.
   One former carrier rep said he typically booked 125 percent of space in order to get 90 percent to actually turn up. Carriers have said repeatedly that kind of booking strategy has to stop. Some have mooted the idea of no-show penalties; others are putting that idea into practice.
   If carriers are sincere in their desire to eradicate that type of buffer in bookings, then NVOs have an even bigger role to play in 2011 and the years ahead. Shippers turned to NVOs in early to mid-2010 to help get space when carriers rolled cargo in Asian ports. They turned to NVOs when carriers' customer service or IT systems didn't measure up to their expectations.
   They will almost certainly turn to NVOs if carriers start requiring, not requesting, shippers to honor their bookings. Having the NVO would alleviate some of the shippers' burden to meet that requirement. In essence, shippers can let the NVO do the arguing for them.
   On the other side of the equation, carriers lean on NVOs to quickly fill space from no-show bookings. Indeed, it appears NVOs have a big role to play in the coming years.

Uncertainty reigns
   Early financial returns on 2010 are in and they look mighty promising for the carrier industry. Maersk Line, CMA CGM, APL, Hapag-Lloyd and Hanjin Shipping netted roughly $7 billion.
   While lines appear on course to recover the more than $15 billion they collectively lost in 2009, bear in mind the industry has a long way to go to completely erase the red numbers from 2009. And lines will argue that any gains made in 2010 merely put them back on course for where they were supposed to be in early 2009.
   That's what makes anecdotal and index evidence on softening transpacific and Asia/Europe rates hard to comprehend. Ship orders have recommenced and idling of ships was nearly non-existent even as a handful of lines admitted demand was particularly low around the Lunar New Year. It seems lessons have not been learned from early 2010, when lines managed capacity exceptionally well on the key east/west trades.
   Even as they were lambasted by shippers and critiqued by the shipping press for failing to provide capacity or service when shippers needed it, they maintained discipline out of necessity. Now, coming off record profits for many lines, that discipline seems to be receding.
   At American Shipper, we get rate increase notices from carriers on a daily basis, but how can those increases take hold when lines lose their grasp on the one thing in their control ' capacity? And with analysts predicting a ramping up of capacity into peak season, it's hard to see how the situation will correct itself.
   Not helping matters are some divergent trade forecasts. One analyst, for example, has predicted as much as 20 percent growth on the eastbound transpacific, while CMA CGM told American Shipper in early March that not a single customer sector sees anything but positive growth.
   'We have to cope with the demand, this is for sure,' said Jean-Philippe Thenoz, the line's senior vice president for North America lines.