No point racing big carriers to the bottom

Spot rates on the transpacific and freight rates on Asia-Europe have almost hit two-year lows and are likely to plunge even further, which is bad news if you own a container shipping line.

Zero freight won’t be offered by the carriers’ sales people, but shippers will no doubt be able to achieve the ridiculous rate in some cases as shipping lines put the emphasis on filling their excess capacity at the expense of profit.

A Nomura research report yesterday called this an “irrational market share and utilisation-driven strategy”, which is spot on. That market share strategy took many lines to the edge just two years ago, and while the top three carriers may believe that only the strongest should be in business, there is no need for the smaller carriers to get drawn into a Darwinian battle for survival.

Shipping lines such as OOCL and NOL – by no means small carriers but without the leviathanesque proportions of Maersk, MSC and CMA CGM – should prepare to weather a storm of rock bottom rates and poor profitability. There is no sign yet that the big three will lay up significant capacity, despite the gloomy demand forecasts that predict low levels of cargo exports from Asia well into 2012.

Even China’s Ministry of Transport this week called the over capacity in shipping “extreme” with an “excessive launch of ships”, and predicted losses in the industry for another two years.

So what should the smaller lines do when faced with two years of low rates, falling demand and too much capacity? As always in tough times, protecting the bottom line is priority number one. There is no future in trying to take on the big lines in their chase for market share. That will quickly become a race to the bottom.

What the smaller carriers should do is withdraw capacity so those ships in operation can improve load factors. Rates will be weak and even though 95 percent utilization will be no guarantee of profit, it is better than 70 percent across the full fleet.

So if this year and the next are expected to be big loss makers, even though shipping executives cling to the hope that somehow consumer demand in the US and Europe will bounce back next year, it would make more sense to cut the number of ships in service.

If the market rebounds, slowly bring back the capacity idling away in hot lay-up. The big carriers may have initially secured a bigger share of the market during the downturn, but in the poor freight environment they will have also racked up losses with every voyage.

The longer the downturn, the more unsustainable the strategy. No matter how big or how strong the big carrier’s balance sheets may be the pressure to stem heavy losses will soon overturn strategies aimed at forcing competitors out of business or boosting market share.