Mega alliances no panacea for volatile rates, says Widdows
As carriers struggle to make GRIs stick, their focus has shifted from the top line to the bottom line.
Shipping supremo Ron Widdows had no good news for customers expecting freight rates to be stabilized by the emergence of the mega alliances.
The CEO of Rickmers Group said at the TPM conference in Long Beach this week that container lines had lost the ability to control freight rates. With so much capacity in the market and being delivered, raising rates to more sustainable levels was difficult. Carriers in the mega alliances were marketing their capacity separately, and each line had its attention firmly fixed on selling its own space first.
Several years ago Widdows addressed the TPM conference on the subject of freight rates and said the prices had to rise to more sustainable levels or service levels would be affected. This sparked a strong response from attending shippers, who complained that with the extra voyage times caused by slow steaming, service levels had already fallen.
Fast-forward to this week and the problems facing the industry have worsened. GRIs and peak season surcharges are introduced regularly and routinely fail to stick as shippers reject liner pleas for sustainable pricing. There are too many ships and too little demand for their services.
Widdows, now on the asset owning side of shipping rather than in the cargo carrying business, says with the kibosh being firmly put on raising rates, the only option available to carriers to increase profitability is to cut unit costs. And the only way to do that is to order larger, more fuel-efficient vessels and put pressure on container terminals to lower charges.
The orders duly flooded in, and Widdows reckons a balance between supply and demand is now so far out there you would need the Hubble telescope to see it.
When Maersk announced it was building 18,000 TEU ships that would reduce its unit costs, it sparked a rush for the orderbooks. And as more lines placed orders, down came prices. Their ships were just as fuel efficient as Maersk’s Triple-Es, but they were able to achieve better unit costs because of the cheaper prices. Bigger did not automatically mean better.
Still, even though there are too many vessels for the available cargo, don’t expect the mass lay-ups that characterised the 2010 rates rise. For a start, it would be particularly painful for a carrier to idle a shiny ship that has just been delivered, but Widdows pointed out that on many trades there was enough revenue being generated to cover costs.
Another option was to go out of business, but Widdows told the TPM that wasn’t going to happen, either. Too much government protection would keep vulnerable lines afloat.
So the carriers will spend the year locked in a battle to “out survive” each other, as the JOC’s Peter Tirschwell put it. It’s a bleak scenario, but a depressingly familiar one for the container shipping industry that years after the bubble burst is still struggling to find a stable business model.