Monday, March 7, 2011

Rate Control Can Give The Edge To Container Carriers Over Bulk Freight Shipping

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Shipping News Feature

WORLDWIDE – A survey of various analysts, often quoted in the financial as opposed to the shipping media, reveals the degree to which uncertainty still reigns supreme amongst the ‘experts’ who advise on the future stock prices of container lines versus bulk freight and tanker operators and owners.

In the past two weeks we have witnessed annual profits from the major shipping lines analysed to the Nth degree, often by journalists whose raison d’être is to keep the stock markets of the world turning over. The (more or less) common thread is the influence China has on both the major cargo carrying ocean freight types but any conclusion requires a crystal ball to analyse accurately the myriad factors which influence the box carrying and bulk freight trades.

The majority opinion seems to be that investment in container stocks are a better bet at the moment than product or oil tankers and, given the uncertainty in North Africa and the Middle East, in the case of the crude carriers this may well be a good decision. The picture for the other two groups is, however, not as clear cut.

With TEU numbers up against the disaster that was 2009, last year, whilst the Baltic Dry Index slumped, most observers make the simple calculation that box lines are the better bet and, certainly short term, that may well be the case, There are however too many imponderables for any half sane analyst to start making firm predictions, too many ‘market models’ only take into account some of the relevant factors, with others either ignored or simply not considered.

What is certain that the only really important factors are the amount of each type of freight needing to be shipped against the number of vessels available to carry it and this is where the two markets each have their own styles and terms of shipment which, certainly recently, have proved to be crucial in the comparative profitability of box over bulk.

The major considerations for the bulk market is always the need for raw materials, principally ore and coal, which in turn is linked to factors like exchange and interest rates whilst, just as the requirement for finished products and components dominates the need for boxes, the charter prices are much more subject to a free market economy. The control exercised by scheduled container shipping services, usually run by a limited number of major lines, can exact much more realistic freight rates at times of over capacity if they move in unison.

The danger of course is the accusations of anti trust behaviour, just as we have seen with air cargo services in the global market, but container carriers would argue that they are merely ensuring profitability by maintaining tariffs at realistic levels and that each customer has the right to negotiate their own rates. This policy however has its pitfalls as evidenced by the case between UK retailer Argos and Maersk Line last year. The Transpacific Stabilization Agreement members are most likely to come under fire, strengthened by Maersk who rejoined in 2009 after a five year absence, the organisation has often been criticised for operating a cartel before, in 1999 a Federal Maritime Commission found evidence that price competition had been virtually eliminated between TSA members.

The problem then was under capacity, the Asian Tiger was a sick kitten and docks were flooded with goods destined for the US with lines able to charge what they wanted. The problems now are the exact opposite, but don’t expect the criticism to be any less severe. With over capacity a real possibility is the temptation for container sales staff to offer discounts, but this may well not be sanctioned by the powers that be that seem over the past 18 months to have realised that a price war is the last thing the industry can afford.

Most box carriers have spent the past year wisely, cutting back on overheads and streamlining operations but the question is can any more savings be made. Slow steaming has helped, particularly as bunker fuel prices rise, but investors know that it is often when an industry is on its knees, and bulk freight prices have rarely been lower, that some of the shrewdest players jump in, knowing the long term scenario is what really matters.

So which is the better bet in the Container versus Bulk investment stakes? There is no simple answer when the ones paid to study such things are divided; when the dust settles those who were right will proclaim it from on high whilst the rest keep heads low, but it is noticeable that the major fleets keep feet firmly in both camps, dividing and diversifying their fleets.

As we said there are myriad factors at work here, from natural disasters like the Australian floods, Chinese currency valuation and interest rates, the purchasing power of the Western economies, the rising price of fuel, over supply of vessels, these all produce a heady mix which leaves all possible outcomes in doubt. Bulk freight charter rates are rising again, the container lines have held their nerves recently better than expected and business continues.

As Punch observed (and latterly Mark Twain) ‘You pays your money and you takes your choice’.