Winners will become self-evident
Sometimes it's necessary to tiptoe gently around an issue in order to address it.
Like the curious case of plummeting ocean freight rates. It's not exactly an Agatha Christie-esque whodunit, but it is incredibly important in the context of ocean carrier survival in 2009 and success in the years that follow.
First of all, let's keep things in perspective. This column has maybe been a bit guilty of portraying some sort of doomsday scenario for carriers this year. But the ocean carrier industry will still be around long after the memory of the current economic slump recedes.
A carrier or two might not live to fight in 2010, but the grand majority will. So it's important to look ahead a bit and see which carriers will prosper ' not in spite of the current downturn, but also because of it.
At the time of writing, rates were showing their first signs of stabilizing, but let's not forget how fast and far rates fell recently ' more than 80 percent since the heady days of 2007 on the Asia/Europe lane, for example.
Someone, or rather some carrier or carriers, drove down the rates on the major trade lanes last year and early this year. I'm certain that the biggest volume shippers know exactly who these carriers are.
Now shippers can say 'there was so much excess volume and when demand slowed, it of course drove rates down.' But then industry as a whole removed capacity, and removed more capacity, and then even more. And the rates kept dropping.
That means someone kept the anchor down on rates. For the purposes of this column, the 'who' is less important than the 'why.' Unsustainable rates are poison to some carriers, those who fight effectively to bring yield from each and every box. For other carriers, short-term pain is the price to pay for long-term gain. In this case, gain might be a commanding share on a specific trade lane, or a larger fraction of a massive shippers' global volume. Or it might mean one or two fewer competitors.
Whatever the motivation, there's a reason for everything. Such low prices as were seen between Asia and Europe in the last quarter of 2008 and first quarter of 2009, some of which were being offered without shippers even asking for them, don't necessarily pass the smell test.
How could it be in a business' interest to literally provide a continuing service virtually for free? This wasn't 'buy one, get one free.' This was 'get one free, get another one free.' There are the explanations that sound reasonable, ones like: 'any box is better than no box,' or 'we're accepting such low rates to keep our customers when things rebound.'
Or it could be that there's a method to the madness. That certain carriers were waiting for the bubble to burst, had stockpiled enough cash to suffer through a sustained low revenue period and are waiting for the other end to become bigger and better.
Again, there are no names here. Just bear this in mind in three years, when demand has picked up again and certain carriers are prospering just that bit more than when things went sour. The names will likely reveal themselves then.
Sorting through history
I recently took a trip down memory lane through the archives of American Shipper and found some interesting stuff. My initial goal was to measure whether we accurately reported whether there would indeed be overcapacity in the liner carrier industry during the period we're now experiencing.
What was surprising to me is that a healthy dose of our coverage, especially in late 2006 and early 2007, centered on the issue of whether industry analysts were actively altering the rate landscape by predicting overcapacity.
That debate shifted focus away from the real issue ' that too many ships were being ordered regardless of whatever analysts wrote. Carriers might argue that the economic crisis ' started initially by reckless mortgage lending in the United States and United Kingdom ' was an anomaly that could hardly be accounted for when they purchased massive ships by the bucketload.
But a better argument is that carriers probably shouldn't have been looking at the very best of times (re: 2002 through 2006) and deciding they would continue forever. Every housing boom has its bust, every economic rise its fall. Expecting trade to continue to grow at such awesome levels was always going to lead to false conclusions.
Now I write this with the wisdom of 20/20 hindsight. Where was this column two years ago, you say?
Well, I looked back at the very first ocean column I wrote for this magazine, in the October 2005 issue, and found that I was advocating that shippers should be at least somewhat concerned with consolidation from the aspect that it might shrink capacity. Obviously, excess capacity was not top of my thoughts then.
But two months later, I wrote about new vessel capacity outstripping projected demand in 2006. That problem never came to pass because volumes skyrocketed in 2006, past any projections made by ports, carriers or analysts. If anything, that year caused the problem. A year where carriers and analysts expected capacity would lead demand, the reverse happened, leading carriers to probably figure that they'd have a tough time meeting demand no matter how many ships they built.
In 2007 and 2008, that thinking quickly turned on the transpacific and Far East/Asia, respectively. And it really had little to do with what analysts were predicting.
I'll go to bat for our magazine and past and future writers ' analysts and reporters don't make the news, we merely report it.
MSC supersizes Far East/Europe
One last note on capacity.
While every carrier alliance and its mother is pulling capacity out of the major east/west trades, Mediterranean Shipping Co. has introduced bigger ships into one of its Far East/Europe services.
The carrier's new behemoth classes of ships (11,660 and 14,000 TEUs) have been shifted to its Silk service to Northern Europe, displacing 'smaller' ships of 9,200 to 9,600 TEUs.
According to maritime news service AXS-Alphaliner, it's not clear whether the bigger ships will immediately augment its weekly capacity. For instance, there might be fewer but bigger ships on the service.
But again, coming out on the other side of the downturn, MSC will have large ships in place on a crucial service, calling at some of the world's newest and most efficient terminals. When demand returns, it can merely add more huge ships to this service ' ships that will be delivered in the near future ' and turn it into an express loop with huge capacity and great transit times.
That's a pretty good place to be even if ships aren't full right now.