Monday, November 14, 2011

Container Shipping Faces Up to the Future as Freight Tonnages Fall

Talk of Mergers as the Reality of Q3 Figures Dawn
Shipping News Feature

JAPAN – EUROPE – WORLDWIDE – As the container shipping lines try to talk up some very disappointing, if expected, results for the third quarter of 2011 everyone in the market is reviewing their options for the future. With all the big lines struggling to turn any sort of profit the fact that there is oversupply in the industry leaves all the players with poor hands when it comes to their own salvation.

As with the economic cycle of a country the wheel revolves slowly for the bigger freight carriers but eventually it must come to a halt for one or more of them. The woes of French giants like CMA CGM have been well documented but focus in the past few weeks has centred on the Asian owned groups like Mitsui OSK Lines (MOL) whose senior executives, including both the Head of Finance and President Koichi Muto, have indicated recently that they have not ruled out a merger with one or more other Japanese box carriers.

The situation for the Japanese is particularly grim having faced not only the downturn in trade over the past couple of years but the nightmare of the earthquake and subsequent tsunami and now the disastrous Thai floods. The Japanese are notoriously patriotic in their selection of logistics suppliers and the disasters at home caused disruption to many shippers and others in the supply chain. Now, with Thailand supplying the raw materials for many Japanese manufacturing companies, including the automotive, computer and electronic trades, the situation there has ceased production for many with no clear indication as yet when normality will return.

Another factor has been the weakness of other currencies against the yen and the Japanese may well believe a co-operation is necessary to match the scope of the European operations which currently handle around half of the Asia/Europe box trade. Whilst Swiss managed MSC and Danish giant Maersk have the size and resources to await better times the Japanese could presumably benefit from the economy of scale a joint venture would bring. There would however likely be problems as this would inevitably involve the usual pooling of resources and consequent redundancies.

Despite the bigger cargo carriers boasting larger fleets the bulk of these are charter vessels which can, if need be, be discarded in due course leading to huge tonnage carrying quantities of ships being mothballed in harbours around the world again. Maersk for example own only 188 vessels yet list their fleet at over 500, most of the balance being on medium and long term charters, whilst it may be the common practice of route sharing which is what will probably prove the largest stumbling block to any unification.

There exists a hugely tangled web of partnerships between the major carriers and one which flexes constantly all over the globe as the tonnage of trades ebbs and flows for various reasons. Today, for example, comes a notification that Hamburg Süd with CCNI on the one hand and China Shipping, Hanjin and Hyundai on the other have reached agreements on optimising their service offering during the forthcoming slack season between Asia and Mexico/South America West Coast with effect from mid-November 2011. To this end, the partners’ three ‘slings’ will be reduced to two.

This notice illustrates the depth of penetration and the complexity which these multinational arrangements can reach. For one or other partner to withdraw from the service would immediately make the market uneconomical for all players. By restructuring the service level each of the lines can reduce the impact that the loss of trade has on them whilst maintaining a reasonable service level in the reduced circumstances. If the box load ratios improve sufficiently with the new season there are less disappointed shippers and the service reputation remains relatively intact and able to develop again.

The tentative proposal for a Japanese ‘National’ line may simply be hot air but the figures (NYK, MOL,K Line et al have all reported expected losses) mean that cost cutting measures, or increased profits, are required in some form or another to enable all to survive at a time when peak time trade in the Asia/Europe container market fell to the lowest level in over a decade.

Meanwhile the fifteen partners who make up the Transpacific Stabilization Agreement (TSA) are reported today as saying they will introduce a surcharge, rumoured to be in excess of $400 per FEU, to combat loss of revenue in the Asia/US trade. These routes are not so stringently subject to the anti trust regulations which sounded the death knell for the Trans Atlantic Stabilization Agreement and which have contributed to the dire situation the major players now find themselves in.

No one supports cartels and anti trust activities except those that profit by them but the container lines necessarily have to plan decades ahead and, like the giant ships they own, turning from a chosen course can prove a lengthy operation. It is to be hoped that they all manage it before one or more founder on the economic icebergs which are looming up ahead.