CSCMP's Supply Chain Quarterly
October 22, 2018

The calm after the storm

After rates rose and plunged dramatically in 2010, shippers will see more stability this year. Increases in capacity will outpace volume, keeping rates from rising.

Ocean shipping often seems like a roller coaster ride, with rates and capacity rising and falling in rapid succession. Shippers' and carriers' experiences over the last two years certainly fit that pattern, but the situation is likely to stabilize somewhat through the end of this year and into 2012.

After an abysmal 2009, containerized ocean carriers were "bullish" in 2010. Initially, they had good reason to be as demand continued strong after the Chinese New Year in mid-February and through early summer. In some trade lanes, rates rose by more than 50 percent, and the future was looking bright for ocean carriers. But then, after a weak peak season and softened demand in the fall, rate levels began to decline again, albeit not nearly as badly as in 2009. Now in 2011, rates have stabilized somewhat but are still nowhere near the level that carriers were hoping for.

Indeed, in April of this year, large importers and ocean carriers were scurrying to negotiate trans-Pacific rates in time for the industry-standard May 1 contract period. Unfortunately for the carrier community, it appears as though rate levels will be down at least 10 percent (excluding bunker fuel surcharges) in the trans-Pacific eastbound trade. Much smaller reductions are expected in the more balanced trans-Atlantic trade.

As for other important trends in ocean shipping for the remainder of 2011 and early 2012, we expect that U.S. container imports and exports will continue to grow. Most analysts agree that growth will range between 3 and 4 percent on trans-Atlantic lanes and about 8 to 9 percent on trans-Pacific lanes. As the U.S. economy continues its recovery, export growth should level off, but this will occur only if the U.S. dollar strengthens, as many economists are predicting.

Building up capacity
Although carriers are continuing to engage in slow steaming and other cost-cutting practices that will impact the supply-demand balance, most analysts still expect that growth in vessel capacity will outstrip demand. In the trans-Pacific trade, for example, "new build" capacity is expected to increase by 15 percent even though volume growth is forecast to only reach the high single digits.

Nevertheless, the top 10 ocean carriers have a combined 2.3 million TEUs (20-foot equivalent units) of capacity on order—and this figure does not include the substantial options for additional orders that have not yet been exercised.

Why so much building right now? Carriers are taking advantage of the easing liquidity and looser credit markets as well as favorable prices for new ship construction, which allows them to resume the aggressive building programs they had largely halted during the recession.

Another factor that will encourage a capacity-demand imbalance is that carriers continue to make most of their investments in ultra-large ships that can only be deployed in the Asia- Europe trade lanes. As a result, the large vessels they replace will move to the Asia-North America (trans-Pacific) trade lanes, further increasing capacity.

Why would ocean carriers choose to deploy these ultra-large vessels if they result in capacity outweighing demand? Carriers that have the financial capabilities to procure ultra-large vessels will enjoy continued trading advantages versus their competition due to economies of scale. Maersk, for example, recently announced that it had ordered 10 18,000-TEU triple- E class vessels. These ships are projected to cut 20 percent to 30 percent of that company's transportation cost. Moves such as this could drive additional consolidation in the industry because carriers that operate very cost-efficient vessels may gain so much advantage that other carriers may no longer be able to compete.

Not enough containers
Even though there is plenty of vessel capacity available, some shippers can expect to experience shortages of another type: a lack of containers. For example, exporters shipping from inland locations may have trouble finding containers as carriers increasingly are looking to turn their equipment closer to the ports in order to cut down on costs. This means there will be less equipment for companies that export from inland points unless they commit to covering the containerpositioning costs through higher rates. We already are seeing this play out in such areas as the Ohio Valley, where exports are booming but exporters are having a tough time getting carriers to commit equipment for outbound loads without a rate premium.

Shippers should also expect some service challenges related to container pickup and delivery while the industry transforms the way container chassis are handled and managed. No longer will chassis be the responsibility of the ocean carrier; instead the burden of providing, managing, and maintaining that equipment will fall on the drayage and intermodal carriers as well as on the chassis-leasing companies. During this period of transition, carriers and terminals will look to push chassis out of expensive waterfront property. Meanwhile, there is still not a clear replacement strategy in place, nor does anyone know how the labor unions will react to losing profitable maintenance and repair work should chassis leave the terminals. All of that can lead to disruptions in the availability and flow chassis.

Longer term, this development could increase costs for leasing companies and truckers, which will now be saddled with the maintenance and repair expenses as well as labor and lease costs associated with storing chassis. Until now, much of this cost has been bundled into terminal expenses and covered by the terminals and carriers. Leasing companies and dray providers will eventually look for shippers to lift the burden of this additional cost.

All of these trends are important, but in the end, the main thing for shippers to understand is that capacity remains greater than demand, and that will continue to put downward pressure on rates. Until supply and demand become more balanced, the only "bulls" out there are likely to be the shippers.

Paul Svindland is a managing director in the enterprise improvement group and co-leads the transportation and logistics practice of AlixPartners, a global business advisory firm. Esben Christensen is a vice president in the transportation and logistics practice at AlixPartners.

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