What will the container shipping industry look like when it emerges from its current funk?
What will the container shipping industry look like when it emerges from its current funk? When will global containerized trade resume its growth? Will the volume grow fast enough to absorb the surplus of vessel capacity that is hanging over the market? How long will that overcapacity keep rates at rock-bottom levels? Will carriers ever learn? These are some of the questions on the minds of anyone involved in global container trades these days. There are no hard and fast answers because they depend on such a wide array of economic and political unknowns. But most industry watchers see profound changes sweeping the industry in the next five years. Here are some of their educated guesses:
? The industry will consolidate further, with the number of container lines shrinking by as much as a third.
? Surviving carriers will have to differentiate themselves on customer service, simplicity of rates and contracts.
? Freight rates will stay low until trade recovers enough to absorb vessel overcapacity, a process that could take as long as four years, unless many existing orders are canceled or postponed.
? The north-south trade lanes will become more important as South America"s trade with China and India grows.
? The top terminal-operating companies will remain dominant and will acquire smaller, less geographically diversified operators.
One unanswerable question crops up every time the container shipping industry plunges into the trough of its perennial boom-bust cycle: Will it ever learn from experience and refrain from ordering too many ships, and from competing only on basis of low rates? Few expect that to happen.
?I"ve been in the industry for almost 30 years and they"ve never learned a lesson to date,? said Steven L. Horton, principal of Horton Global Strategies, an Atlanta consultant who negotiates freight rates for shippers.
Peter Shaerf, managing partner of AMA Capital Partners in New York, agrees. ?Shipping lines follow each other into the water time after time, just like their mascot, the lemming,? he said.
Carriers are in survival mode
With the economy in recession ? it"s the 12th month of recession, according to the National Bureau of Economic Research ? and with no sign of improvement on the horizon, carriers are in survival mode. With load factors deteriorating and freight rates at historic lows, they are seizing on every option they can to staunch the bleeding. They are cutting capacity by eliminating at least one of their Asia-Europe or trans-Pacific loops and combining others in vessel-sharing agreements with erstwhile competitors. New World Alliance partners APL Ltd., MOL and Hyundai Merchant Marine are laying up 40 vessels, and APL has announced 1,000 layoffs worldwide.
Some carriers, such as Zim Integrated Shipping Services and Pacific International Lines-Wan Hai, which only operate one Asia-Europe service each, are eliminating those services and buying slots on other carriers to tide them over with existing commitments. srael Corp., the Ofer family holding company that controls 98 percent of Zim, moved to rescue it recently with an injection of $150 million if needed, after the carrier swung to a third-quarter loss. The company also is preparing a restructuring program. Israel Corp. said Zim"s strategic plan envisaging large increases in shipping capacity and cargo volumes in 2009-12 ?cannot be implemented under current market conditions.?
Other carriers may not have a guardian angel, and liner shipping executives expect some carriers to fail, which will lead to widespread consolidation in the still-fragmented industry.
?Quite frankly, some people won"t survive,? said Ron Widdows, chief executive of Neptune Orient Lines, parent of APL. Maersk Line Chief Executive Eivind Kolding told a logistics conference in Germany recently that he expects a fresh wave of mergers and acquisitions in the industry.
The lines that fail are likely to be among the smaller carriers, most say. ?I don"t believe that the big companies will go out of business,? said Anil Jay Vitarana, president of United Arab Agencies, which represents United Arab Shipping Co. in North America.
Chinese carriers are largely government-owned
?They have deep pockets. Eight of the (top) 10 are not totally liner operators.? The Japanese carriers have large Japanese trading companies behind them, and the Chinese carriers are largely government-owned or subsidized.
Several of the top-tier operators have formed vessel-sharing agreements such as the ones that Maersk and CMA CGM announced last month between Asia and North America. ?A year ago, we would have called them strange bedfellows,? Vitarana said. ?People will find ways to survive.?
The liner shipping industry lacks the political clout that has allowed the banking and automobile industries to pressure governments for bailouts. This is largely because liner carriers don"t employ large numbers of workers in the countries where they are based.
Governments may eventually face heavy lobbying pressure as some big shippers push for intervention, but that"s not likely until after one or two of the big carriers begin to totter. Their host governments may realize that carriers help grease the wheel of global commerce and understand that their loss would result in less competition, but there are no guarantees.
Some container terminals may be in trouble, too. Terminals that were snapped up by investment banks and infrastructure funds in the heady days three years ago when they looked like money trees may again become candidates for acquisition. With the slippage in U.S. container volumes this year, some of the recently acquired terminals have failed to meet covenants their buyers struck with lenders, who could force their sale to recover the loans.
Similarly, carriers that operate terminals in their major markets may also be forced to sell some of them as a means of survival. The top global terminal-operating companies, whose geographical diversification enables them to survive the downturn, would be logical buyers of any terminals that come on the market.
Further consolidation of liner companies appears inevitable. There will be fewer and larger carriers among the surviving lines, and they will have to compete by differentiating themselves on the ease of doing business with them. They won"t be able to differentiate themselves on individual vessel services, because many of them will be transporting cargo on the same ships through vessel-sharing agreements.
Competition on customer service
?They"ll have to compete on customer service, simplicity of rates, simplicity of contracts and by providing visibility through information technology,? Horton said. He said it will be much more important for importers and exporters to spend the time to know about every single carrier and their rates and services, ?because the days of (rate-setting) conferences are over when everybody"s rates and surcharges were the same.?
The likeliest targets for acquisition may be the smaller lines that specialize in north-south services. ?The trades with Latin America are still doing all right because most of the major carriers have pulled out,? Horton said. The north-south trades will become more important with the continuing growth of the economies of China and India, which will demand more raw materials of the kind that Latin America and Australia produce, which will, in turn, fuel further demand on the southbound leg for the kind of consumer goods that those Asian countries make.
The death in October of CSAV founder Ricardo Claro could make the Chilean carrier a target for acquisition, Horton said. CSAV has been experiencing problems raising capital, and Standard & Poor"s placed its ratings on CreditWatch Negative. Horton thinks that Hamburg Sud, which specializes in the north-south trades, might become another takeover candidate.
All of this assumes that the carriers can work their way out from under the huge amount of vessel capacity that is hanging over the main east-west trades.
Carriers that have been ordering huge numbers of big, new vessels of up to 13,000 TEUs have nowhere to put them when they are delivered next year and in 2010.
?I"m sure 2009 will be awful for shippers, logistics companies and container shipping lines,? said Philip Damas, division director of Drewry Supply Chain Advisors. He thinks there"s a 50 percent chance that demand could pick up halfway through 2010, because many of the ships on order may be canceled or delayed. ?It all depends on how many of the existing orders are canceled. If all of the tonnage on order is delivered, you"re talking about a downturn in the container shipping sector lasting four years.?
Trevor Crowe, container analyst with Clarksons, the London ship broker and shipping services provider, is more optimistic. ?Over the last 20 years, the average annual growth rate of the container trade has been close to 10 percent,? he said. ?If, over the next five to 10 years, once we get through this horrible downturn in the world economy, the average growth rate in the trade gets back up to that 8 to 10 percent range, that would create a requirement for quite a lot of new capacity.
?This is going to create new challenges in its own right,? Crowe said. ?Can we build enough ships and create enough port capacity??