Balance is missing as the carriers lurch from an overblown orderbook to an over supply of tonnage amid slowing trade and weak freight rates.
Something that continues to amaze is a disconnect in the container shipping line industry between ship capacity and demand.
Why is it not possible to achieve a better balance? Some of the brightest minds in the business have grappled with the issue and the end result remains too many ships for too little cargo.
One reason many people subscribe to is that the lines have an obsession with growing, or at least maintaining, market share.
We understand that carving out a share of a highly competitive and cutthroat market and hanging on to it is what business is all about, but is market share really more important than profitability? Surely carriers should increase their profitability first and only then, backed up by a strong balance sheet, focus on growth.
If anyone has thoughts on this, don’t hesitate to lunge for the comment button at the end.
Besides a spike in profits a couple of years ago from a restocking bounce, the lines are regularly reporting huge losses. This year will be no different, and unless there is a massive surge in orders from the US, only two or three lines will be able to draw happy faces on their books come December. As the TSA said in a statement yesterday, "Average carrier operating margins have been negative since the beginning of 2011, bottoming at -12 percent in first quarter 2012. Of the top 17 transpacific lines, 11 have debt-to-cash ratios exceeding 6-to-1, and six have ratios exceeding 8-to-1."
Replenishing ageing fleets is a reason to order new vessels, but much of the capacity in operation is too young to scrap and will be cascaded to other trades to make way for the newer, and predominantly larger, tonnage coming online.
The situation is so serious that it even got Cosco boss Wei Jiafu to plead with the shipping industry to avoid “vicious competition”. He was full of advice up in Xiamen recently: Don’t expand fleets, no price wars, cooperate and compete fairly, don’t capitalize on the situation.
Of course, container shipping lines have been expanding fleets, engaging in price wars and ruthlessly capitalizing on whatever situation, wherever they can, for several years now.
Wei predicted two more years of pain, and his own carrier certainly has a lot of that. In the first half Cosco posted a loss of US$771 million, the largest six-month net loss since it listed in Hong Kong in 2005.
The good captain’s points are all valid, not that anyone in the container shipping business will listen. In a struggle for survival, when a rival locks in new ship orders, competitors race to follow and hope the market recovers.
It generally does, except that by then there is so much capacity available that freight rates are too low and profitability disappears.
Capt Wei was partly right, except it is not so much vicious competition hurting the industry, as a vicious circle it has trapped itself in.
Source: Maritime Professional