Widdows: If economy slows, don’t expect container rate bargains
Don’t expect to see carriers slashing freight rates this year to fill their ships this year if the U.S. economy enters a recession.
“Supply and demand in 2008 is not really relevant — the supply side will be tuned to what the economic conditions can support,' said Ron Widdows, chief executive officer of APL Ltd. 'It is a very different dynamic than has existed in this industry for a long time.”
Widdows, in a keynote address to the Journal of Commerce’s Container Transport Investment Conference in New York Monday, said, “You are going to see rates increase in the transpacific. That the U.S. economy, the stock market, and some of my customers are not faring well economically will not be relevant. Rates will go up. They must. The underlying costs are too high. Rates are going to go up, bunker recoveries are going to increase.
“The economics have to improve or the assets are not going to be there. This is an industry that has to reinvest billions,” he said. In the next year, for example, transpacific carriers expect $10 billion in capital costs just to achieve single-digit increases in capacity, he added.
“For the returns that exist today that just is not sustainable,” he said.
Shippers can expect carriers to seek both recovery of higher fuel costs as well as increases in base rates. Widdows said he has been pleased by the willingness of many APL customers to agree to higher bunker charges before the end of the current contract year.
Widdows told investors at the conference not to view all container-shipping companies as being cut from the same cloth.
“Today carriers are focusing more on profitability” with less emphasis on company size or market share, he said. Rather than making money in up cycles and losing money in down cycles, some companies “have found a way to be profitable through the cycle.
“There is a way in this business to make sustainable profits and generate return on capital that is adequate for reinvestment,” he said.
Widdows said one way carriers will reduce costs is to slow ships. He said the New World Alliance, of which APL is a member, is planning to add a ship to three different Asia/Europe services. The additional ships will allow those loops to reduce speeds to about 20 knots, from about 23.5 to 24 knots. That will save fuel and allow APL and its partners to get better utilization of the ships. ' Chris Dupin