Ocean Carriers and Ports Forecast Bright Future

Stephen DeAngelis

May 20, 2011

A little over a year ago, with the world starting to emerge from the Great Recession, supply chain analyst Bob Ferrari wrote:

“Shipping delays of three to four weeks have been common, and shippers have become increasingly frustrated with ocean carrier service levels. The picture seems to be one where the ocean carriers want to defy the notion that the customer should be the focal point in determining acceptable service levels. Another concern … is that some U.S. ports lack the capacity to handle larger outbound shipping activity, having instead placed a primary focus on servicing large volumes of imported container laden volumes. The picture is one where severe drops in global trade destined to U.S. and European ports has caused ocean carriers to not only severely idle fleet capacity, but also slow down the cruising speeds in existing ships in order to save on fuel.” [“Service Level Erosions in Ocean Transport- Have supplier relationships broken down?, Supply Chain Matters, 12 March 2010]

Ferrari highlighted three challenges that continue to face the maritime industry, namely: ship and container capacity, port capacity, and rising fuel costs. Although ocean carrier customer service was the focus of his post, Ferrari did note that the three challenges had an impact on customer service. Over the following months, the customer service situation didn’t improve. In July, Stephanie Clifford reported, “Fighting for freight, retailers are outbidding each other to score scarce cargo space on ships, paying two to three times last year’s freight rates — in some cases, the highest rates in five years. And still, many are getting merchandise weeks late.” [“Retailers Pay More to Get Cargo (No Guarantee),” The New York Times, 26 July 2010] Clifford points to the same causes for poor customer service as Ferrari, she continues:

“The problems stem from 2009, when stores slashed inventory. With little demand for shipping, ocean carriers took ships out of service: more than 11 percent of the global shipping fleet was idle in spring 2009, according to AXS-Alphaliner, an industry consultant. Carriers also moved to ‘slow steaming,’ traveling at slower and more fuel-efficient speeds, while the companies producing containers, the typically 20- or 40-foot boxes in which most consumer companies ship goods, essentially stopped making them.”

Jump ahead nine months to March 2011. Bruce Bernard reported that the container shortage had not eased [“Carriers Face Renewed Container Shortage,” The Journal of Commerce, 8 March 2011]. Bernard reported:

“Ocean carriers face a shortage of containers in the coming months as production of boxes lags growing cargo capacity, according to Alphaliner. The box-inventory-to-vessel capacity ratio will drop to 1.99 by the end of the year from 2.03 in 2010, the Paris-based analyst forecasts. This is the lowest ratio on record and compares with the capacity ratio of 2.99 boxes per slot in 2000.”

Bernard, like Ferrari a year earlier, reported that “back haul shippers from the U.S. and Europe will be hit hardest by the box shortage.” And like Clifford, Bernard reports that container shortages “will drive up freight rates, mirroring the situation last summer when lines responded to a dearth of equipment by imposing peak season surcharges of up to $750 per 20-foot container on the Asia-Europe trade.” All this is bad news for shippers and importers, but not so bad news for ocean carriers and ports that are enjoying increasing business. Bernard reports that efforts are being made to reduce the container shortage. He concludes:

“The box-to-slot ratio has been shrinking gradually over the past decade, partly reflecting the more efficient management of equipment by container lines, according to Alphaliner. Over the past decade the global inventory of containers grew 6.9 percent annually while the container ship fleet increased 11.1 percent per year. … The acute shortage of containers, particularly on routes from Asia to Europe, as global traffic rebounded prompted Maersk Line to start manufacturing new containers and re-activate laid up vessels to reposition empty boxes. The imbalance has stabilized since July [2010], according to Alphaliner, as container manufacturers resumed production and carriers halted the scrapping of older equipment. … The industry has to adapt — through faster turnaround of equipment, improved upkeep on old containers and extending the lifespan of boxes, Alphaliner said.”

Do current efforts mean that the situation is likely to improve over the coming months and years? Not according to the editorial staff at Supply Chain Digest which predicts that demand will continue to outstrip capacity [“Looking Ahead, Drewry Says Large Gap Coming Between Ocean Shipping Demand and Capacity,” 16 March 2011] The article reports:

“While some believe in 2011 that the leverage will swing back to shippers and importers after ocean carriers enjoyed generally banner bottom lines in 2010, 2013 looks to be another great year for carriers as demand growth will outstrip capacity additions by a near record margin. Shippers be warned. According to analysts at Drewry Shipping Consultants, that change in supply-demand balance will naturally also lead to a strong growth in ocean shipping rates, which it expects to rise 10% in 2013. This is despite the fact that many ocean carriers have aggressively starting to add capacity back, after significant cut backs during the economic downturn.”

The article goes on to note “that capacity addition is led by ocean shipping giant Maersk, who recently announced it was upping the megaship ante and then some when it recently announced that it had placed an order for 10 new cargo ships capable of handling 18,000 twenty-foot-equivalent units (TEUs).” To learn more about Maersk’s new megaship, the Triple E, read my post entitled Shipping Industry Update: Going Big and Going Green. Despite the fact that Maersk is supposed to start receiving these behemoths in 2013, “Drewry says the tide will turn that year strongly in the carriers’ favor.” Maersk Container Shipping CEO Eivind Kolding believes that between now and 2013 cargo rates will stabilize if not decline. The SCD staff explains why:

“Kolding … believes this year will be a better one for shippers in terms of rates, predicting that prices will fall this year compared with 2010 as new tonnage enters the market and takes a few months to absorb. ‘We’ll have reasonable rate levels throughout the year, but with a difficult start and a pickup in mid-2011,’ he told Bloomberg.”

The analysts at Drewry, however, believe that stabilized prices won’t last. The article continues:

“Container capacity will advance 8.2% in 2011, the same as in 2010, before growth slows to 6.5% in 2012, Drewry predicts. But ocean carriers are remaining cautious versus the years before the recession began. Ship orders have dropped for the past three years and currently stand at 452, down from a peak of 1,245 in January 2008, according to Lloyds Register-Fairplay data. Drewry predicts however that demand for container transport will increase 9% in 2013, while carrier capacity will grow by just 6.4%. Over the last decade a 2.6 percentage-point difference between demand and capacity growth would rank after only 2010, when shipping rebounded from the recession, and 2004, when Chinese exports surged.”

The analysts predict that the gap between supply and demand will result in rates going “up at least 10%” in 2013. Drewry’s Philip Damas told the SCD staff, “It should be a great year for container lines.” The SCD staff quickly noted that what is good news for carriers will only “add transport cost pressure on shippers and importers.” The article does note that Drewry’s forecasts are not unanimously accepted. “An executive at one large shipper told Bloomberg he thinks the Maersk strategy may actually lead to lower rates.” With surging oil prices significantly increasing transportation costs and slowing down economies, the executive may just be correct. We’ll just have to wait and see what unfolds. The only dark spot on the horizon for ocean carriers is that the European Commission is investigating some of them for antitrust violations [“Shipping Lines Are Raided in Antitrust Investigation,” by John W. Miller, The Wall Street Journal, 18 May 2011] Miller reports, “The raids followed an investigation of how container shipping prices rose in 2009 even as demand dropped and industry capacity expanded.” Carriers that were targeted for investigation included, “Denmark’s A.P. Moeller-Maersk A/S, the world biggest container carrier by volume; No. 2 CMA-CGM SA of France; and No. 4 Hapag-Lloyd AG of Germany.”

 

The middlemen between ocean carriers and shippers/importers are the ports. Ports on the U.S. West and Gulf Coasts believe, despite facing some challenges, that the future looks bright [“CEOs at Ports of Houston and Seattle Bullish on Future, But See Challenges,” Supply Chain Brain, 3 May 2011]. The article reports:

“The CEOs of the ports of Houston and Seattle are bullish on the future of their regions and their ports, though for different reasons. Population growth in the U.S. Southwest and an expanded Panama Canal will drive new business to the Port of Houston, says CEO Alec Dreyer, while Port of Seattle CEO Tay Yoshitani sees proximity to Asia and a strong sustainability program as growth drivers for his Pacific Northwest gateway. Yoshitani also points to momentum, with the Port of Seattle coming off a very strong year in 2010. ‘We posted a 35-percent increase in business over 2009,’ he says. ‘A lot of that growth was organic, but we also gained market share. We were very pleased with those numbers.’ Dreyer points to the Port of Houston’s location in a rapidly growing state and region. ‘From the Port of Houston, you can reach anywhere in the heartland of America within one or two days by truck,’ says Dreyer. Equally important is additional traffic that will move through the Panama Canal when a new set of locks is completed in 2014. ‘Today 20 percent of our traffic goes through the canal, and we think that will easily double over the next five to 10 years,’ says Dreyer.”

West Coast port operators concede that that when the new Panama Canal locks are completed they are likely to suffer a drop in activity. They are optimistic, however, that they will recover from the drop. As Yoshitani told Supply Chain Brain Staff members, “In the long run, though, I think there will be capacity constraints for all U.S. ports. I don’t know how long it will take, but there will come a time – not so far in the future – when shippers will be happy that they have options on all coasts.” Yoshitani’s optimism is mirrored in a report issued by the NAIOP Research Foundation [“Report Examines Effect of Global Manufacturing, Consumption on Growth of U.S. Ports and Distribution,” Supply Chain Brain, 15 November 2010]. According to the report, “much of [the shift of ‘transfer’ cargo involved in] all-water services from western ports to eastern ports has already occurred.” The report concludes, “New ships that carry larger loads of cargo will have a more dramatic impact on the eastern ports, as ships with only regional capacity will be segregated from those with the necessary infrastructure to support the larger ships and will move goods efficiently and competitively both on a regional and national platform.” This assessment agrees with Yoshitani’s:

“Capacity constraints and insufficient infrastructure are challenges facing all port directors, Yoshitani says. ‘Infrastructure for all freight modes is something that has been neglected by the federal government for years,’ he says. ‘This has to change.’ Dreyer agrees. ‘We can’t just focus on the seaside infrastructure,’ he says. ‘We have to deal with the landside infrastructure that backstops the investments we make.'”

To learn more about what major U.S. ports are doing to improve their infrastructure, read my post entitled Ports Vie for Increased Market Share. I believe that Yoshitani’s assessment that capacity constraints are coming is correct. In order to address these constraints, ports and other inter-modal transportation stakeholders must continue to improve efficiency to keep goods flowing. At the same time, they must ensure that arriving containers are safe for transshipment. These are not easy challenges to overcome. Fortunately, there are companies like mine that are working with port operators to make their operations more safe and efficient. Without an efficient supply chain and supporting infrastructure, America’s economic recovery will be hard to maintain.