Shipping lines painting themselves into corner
Time：2013-03-12
Browse：53
This would prevent freight rates from rising and profitability pressures would continue until there was a sustained upturn in cargo demand.
Sound familiar? Yes, it is a mirror of the situation the container shipping business finds itself in: Too much capacity; too low rate levels.
The freighter aircraft resting at airports are the aviation equivalent of shipping’s “hot lay-ups”, where ships are maintained and ready to come online at very short notice.
Container lines are struggling to get freight rates to rise on the east-west trade lanes and with economic growth in Europe expected to be zero this year, and with maybe 1.5 percent growth in the US, demand is going to remain weak for a while. Supply, on the other hand, is stronger than ever, and the carriers need to start laying up more capacity or the profitability problems that kept most lines in the red last year will persist.
Even a surge in scrappings won’t solve the problem. Alphaliner said in a report last week that even though ship capacity “deleted” from service reached a record 400,000 TEUs in the past year, container ship capacity to be delivered in 2013 will total 1.68 million TEUs. The net capacity increase will be 7.3 percent, radically outpacing demand.
Also last week, we came across an interesting comment in a business magazine where a carrier executive maintained the container shipping industry was “at a crossroads where cargo interests must choose between paying higher rates for value-added service, or contending with another round of consolidation as carriers merge to survive”.
Not being a paid subscriber, we were unable to read beyond the first paragraph to see how the executive expanded on this point, but the comment raises some issues.
In our experience, it is not the shippers that are forcing container lines into offering low freight rates. The mega shippers such as Wal-Mart, Target and IKEA, or giant forwarders K+N, DHL and others, may have strong negotiating positions because of the huge volumes they ship, but as far as we know, no guns are drawn at those contract meetings. Cigars and cognac, maybe.
It is the lines themselves that are locked into a market share maintaining mindset that results in carriers racing each other to the bottom.
And as far as we know, forwarders and shippers do not like to pay bargain basement freight rates for the very reason that it often has an impact on service levels. Schedule reliability, drop-off and pick-up times cast in stone, last-mile delivery – that is what excites shippers, not rates that put lines in the poor house.
Surely profitability is more important than maintaining market share? That seems to be a question that never gets answered. A profitable container line can build for the future, while a loss-making carrier is continually cutting costs and trying to find new ways of servicing its debt.