Economic Development / Ocean / Ports

No Calm for Maritime

It looks as though continued volatility will be the story for ocean shipping

August 15, 2014
Trans

As much as one hates to use the phrase “shot across the bow” when writing about maritime shipping, there’s likely no better way to capture the surprise inspired by China’s recent decision to block the formation of the P3 alliance.

After all, the proposal by the world’s three largest container shipping lines — AP Moller-Maersk, CMA CGM and the Mediterranean Shipping Company — to share space on about 250 vessels plying the Asia-Europe, transatlantic and transpacific sea lanes had already been approved by U.S. and European regulators.

The Chinese, however, mindful of concerns for their own smaller, state-run shipping lines, viewed the proposal with much more concern than their counterparts in the West. Together, the P3 partners already control over a third of global container traffic and nearly half the traffic that currently moves between Asia and Europe.

In mid-June Chinese regulators said the alliance, which would only aid to widen the gap between the shipping behemoths and their rivals, was not in “social public interest.”

In the wake of the decision, a spokesman for A.P. Moeller-Maersk said the company was disappointed but is working on alternative plans to cut costs and address overcapacity.

“We have different tools in our toolbox to activate,” Vincent Clerc, marketing officer at Maersk Line, said during an appearance on Bloomberg television.

All the same, he continued, shipping lines need to confront the reality of falling prices and overcapacity that he believes will remain a feature of the industry for years to come.

Although for many of us, the global financial crisis is something we see receding further and further away in our psychic rearview mirrors, it’s different for the shipping lines that ferry the world’s goods. The volume of containerized goods traversing the world’s sea lanes plummeted in the wake of the banking mess, and even today those volumes have barely recovered.

The situation has been compounded further by the apparent unrelenting desire among the shipping lines to debut new, gargantuan ships that have bloated the global fleet at precisely the same time that logic suggests they should be slimming down.

As of January 1, 2014, the global fleet of container ships consisted of 5,043 vessels, up from 5,010 at the start of 2013, and the number of vessels only continues to rise.

It is little surprise then that according to The Economist, 17 of the world’s top 20 shipping lines are breaking even or losing money.

In light of that, industry observers say they understand the desire to forge alliances. Indeed, of the top 20 shipping lines, 14 are tied up in three global alliances, which in turn handle a staggering 80 percent of the global container business.

But in the same breath they suggest that one solution — no matter its scale — is hardly enough to address all the fundamental challenges confronting the ocean sector in a volatile world, and one never knows when a China or somebody else might torpedo even the most well-made plan.

“The reality is when it comes to the ocean sector, whenever you believe there is some logic to it and that you get that logic, something changes,” says Dominik Tichelkamp, COO of Global Ocean Freight at CEVA, the multinational logistics, distribution and transportation firm.

Union of Competitors

To be sure, while P3 has been dealt a blow, alliances aren’t disappearing. Ask a container shipping line operator, and what they say is that by pooling resources they can offer more frequent service to more ports. And, as with every economy of scale, increased efficiency is the name of the game.

At the same time, being part of an alliance affords the individual lines several ways to cut costs, starting with ensuring that their new, highly efficient ships plying the oceans do so with less empty space, and extending to the greater bargaining power with port operators and others that comes with being part of a group.

To offset fears that such advantages damage competition, alliance members often describe themselves as states within a federal union — together they are one, but they continue to sell space on ships separately and to compete on price.

Sometimes that’s a compelling argument, sometimes not. And sometimes it’s simply a matter of who’s making it.

During the same sessions at which regulators considered P3’s fate, another new group, G6, comprising firms from Japan, South Korea, Hong Kong, Singapore and Germany, sailed through the regulatory gauntlet.

Led by Nippon Yusen Kaisha (NYK Line), Japan’s largest shipping line, the alliance comprises Hapag-Lloyd, APL, Hyundai Merchant Marine, Mitsui OSK Lines and Orient Overseas Container Line.

If the association of many of these names seems familiar, it’s became G6 is actually the merging of two smaller, three-party alliances. Together, they plan to pool up to 90 ships calling at ports in Asia, Europe and the Mediterranean.

What the continued interest in alliances suggests is that carriers have largely given up hope that demand will outpace supply and they’ll be able to make a killing on sustainably higher rates anytime soon. That makes optimization all the more critical, and what better way than to cover as many sea lanes as you possibly can with fewer of your own ships?

Then, there are the theoretical advantages that can be offered to customers, including better port coverage, daily sailings or better schedule integrity.

“The reality is that everyone who needs to move containerized cargo has an alliance or two in their logistics portfolio,” says CEVA’s Tichelkamp. “But at the end of the day, the big question is what will these big alliances do as a result of the cost-reductions and efficiencies they achieve?

“Will they use them to take higher profits? Or will that use them to gain market share? That’s something we have yet to see, and, depending on what their strategy is going forward, that will drive what this means not only to CEVA but to everyone else in the forwarding industry,” Tichelkamp points out.

“Will they use their reduced costs to continue the cut-throat competition that we’ve seen in recent years, or will they use it instead to come back into the black, which for many carriers has not been the case for years?”

“That’s really the great unanswered question regarding alliances, and in that void we try to anticipate different scenarios and plan for those,” Tichelkamp says.

Intra-Asia Growth

Of course the forging of alliances isn’t the only trend roiling the mind when it comes to the ocean sector.

Another is the growth of containerized cargo on intra-Asian routes, a phenomenon that’s seriously gotten the attention of Maersk and other traditional long-haul carriers, according to an analysis by Drewry Maritime Research published in early June.

Coupled with the cheap vessel charter rates, the market is proving hard to resist for firms like Maersk, which has started two new services in the region in the past year — one a SE-Asia/China service utilizing three 5,000 TEU vessels, and the other, through its MCC Transport subsidiary, relying on three 5,000 TEU vessels to make weekly calls on ports in Japan, China and Thailand.

Other regional services include a Japan-SE-Asia service by — you guessed it — an alliance comprising NYK, K Line and Hapag-Lloyd, and another comprising the COSCO, Yang Ming, PIL and Wan Hai lines.

How big the trade actually is at this point is hard to pin down. As anyone who is familiar with the region knows, the trade lanes there are still diffuse, and in many areas services are restricted to very small vessels because of the available draft.

But Drewry suggests interest is intense and that this is pushing regional players to form defensive alliances as a bulwark to new competition. These include a tie-up between Pan Asia Shipping, Sinotrans and Shanghai Puhai Shipping which is now offering services between China and Japan.

Southeast Asia isn’t the only region Drewry sees as heating up. Earlier this year its analysts announced that activity at nearly all large Mediterranean transshipment hubs saw double-digit growth in 2013, well above global growth levels.

The research firm found the significant jump in activity could be directly attributed to both the trend toward bigger ships and the proliferation of alliances and that this growth will likely continue for the foreseeable future.

One downside of the expansion of the world’s container ship fleet is that its growth is far outpacing the supply of experienced maritime workers.

Here, as in other instances, it is Asia where the battle has been joined. One of the best-known worker-development initiatives in the region was established by the Maritime and Port Authority of Singapore. The Maritime Cluster Fund — Manpower Development (MCF-MD) (http://www.mpa.gov.sg/mcf) was established to attract talent to the industry.

There are three key components under MCF. The MCF-Manpower Development co-funds maritime companies in the development of manpower training initiatives and capabilities. The MCF-Business Development supports eligible expenses incurred in the initial development of new maritime companies and organizations setting up in Singapore or existing maritime companies and organizations expanding into new lines of maritime businesses. Finally, MCF-Productivity supports initiatives by the maritime industry that will lead to productivity gains.

Irrational Pricing

If economic growth and heightened trade activity in places like Southeast Asia and the Mediterranean is helping to spur activity in the ocean sector, several factors are hindering it. The first, if you can pardon the expression, is irrational behavior.

“As someone standing outside the decision-making process, you sometimes do wonder what the decision-makers are thinking,” Tichelkamp says. “For instance, the rate spikes we’ve seen occur on the Asia-to-Europe route, where people were paying $1,000 per container from Shanghai to Rotterdam. Basically, at that point, people were simply injecting cash into shipping a container — something that isn’t prudent or sustainable.

“I’ve seen this before, but I was surprised by the speed and the extent to which this happened, and it makes one wonder when the shipping lines will learn their lessons,” he says.

“There’s this eternal battle between optimizing profitability and holding onto market share, and it amazes me that we allow this conflict to drive our business to the extent that we’ve seen — particularly in the second half of last year,” Tichelkamp continues. “You would have thought the economic crisis would drive a different behavior from the shipping lines going forward, but in many ways, it hasn’t.”

And then there are the X factors — the sources of volatility that are well beyond the control of the board room.

These are almost always a jolt out of the blue. The biggest factor right now is the crisis in Ukraine following Russia’s annexation of Crimea. Despite some intermittent promising signs — the latest as of this writing being Russian President Vladimir Putin’s asking for the revocation of a parliamentary authorization that gave him the power to invade Russia’s neighbor — the situation is fraught with uncertainty.

So too is the unfolding drama in Iraq where the Islamic State of Iraq and Syria (ISIS) has seized a vast swath of Iraqi territory.

The latter crisis came just as Iraq’s port community was showing emphatic signs of switching from a military to commerce-based footing, and international investors were expressing confidence in that country’s future in this regard.

International Container Terminal Services Inc., for instance, announced not long ago that it is investing more than $130 million in a long-term deal with Iraq’s Port Authority to operate and improve the container handling capacity at Umm Qasr, the country’s sole container terminal.

How ISIS’s running amuck will impact that investment is difficult to gauge, and ICTSI, a port management company based in the Philippines, has been mum on the subject, failing to respond to a request for comment.

Similarly circumspect is North America Western Asia Holdings, which recently made a multimillion-dollar capital investment in an effort to expand and modernize the historic Port of Basra, a project it is undertaking with the Iraq government.

But it is Ukraine that has the biggest potential to upset the global economy and the transportation and logistics sectors that robust economic activity supports.

For every promising step toward a resolution of the crisis, there are two or more that threaten to cause its unraveling, such as accusations that Russia is fomenting an insurrection in eastern Ukraine by channeling weapons, equipment and volunteer fighters across the porous border.

Most Europeans say they were absolutely blind-sided by the crisis, having believed that what’s now seen as an over-arching East-West conflict was a thing of the Cold War past.

“Even for an individual like me, who travels all the time — I’m basically traveling 180 days a year — the speed and the momentum of the crisis was really surprising,” Tichelkamp says.

He says as the crisis festers, its effect on the world economy will continue to grow.

“It’s different, for instance, from the situation in Syria, because while the Syrian crisis is terrible for its people, the country is rather isolated when it comes to the things like international trade. Ukraine is right on our doorstep,” Tichelkamp says.

“In addition, and more to the point of what we’re talking about, if and when Western sanctions begin to take hold, they will certainly hit European industry ... because we see Russia as quite an effective market for everything we produce.

“At the same time, there’s also the possibility that oil and gas from Russia will cease to flow at a time when Europe cannot really source them from anywhere else — and all of these factors have a real potential to slow down the economy. As a result, the potential for the Ukraine crisis is actually quite high at the moment,” he says.

“On the other hand, and on a much more positive note, I think China’s efforts to address its environmental problems have the potential to be a great positive for the shipping and greater logistics industries,” Tichelkamp says. “If this momentum grows and China, as one example, begins to buy more and more hybrid and electric vehicles built in Europe, that’s going to benefit us and be a big boost to the ocean and logistics sectors.

 “When the economy is booming, transport and logistics typically are booming as well. It’s simple logic, but so far it has been quite consistent,” he says. 

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