Too much tonnage, recession or no recession
The container shipping industry was headed for overcapacity even without a slowdown in trade.
When Maersk chief financial officer Morten Nicolaisen was asked at a New Jersey conference this week how on earth the lines could have found themselves in such a catastrophic overcapacity situation, all he could come up with was a verbal shrug.
“The collective behaviour of carriers adding more ships is what has led to this situation we are in today,” he told his audience.
It wasn’t much of an answer, and when pressed, he said: “Everyone was looking at upward curves and it was more ships, bigger ships with very little thought of what it would do to the industry when the supply and demand gap began widening.”
That staggering lack of foresight has left the container shipping industry with more than 10 percent of its capacity lying idle and laid up. The waters around Singapore look like the places ships go to die, rather than the world’s busiest maritime trade lane.
But the truth is that container shipping executives blindly followed each other, desperately afraid of losing market share. In the financial market, when everyone is screaming “buy, buy, buy”, it is a brave man who yells “sell”. With most of the major carriers placing orders in the last few years, it would have taken a bold CEO to face down his board and argue against adding capacity.
Perhaps the business is simply geared towards boom and bust cycles. Times are good – order ships and hike freight rates. Times are bad – live with low capacity and weak rates.
At the same conference, an economist pointed out that in the past five years, the carriers fleet has grown by 60 percent, so even if the recession had not happened the industry would still have ended up with overcapacity.
In the real world, so much excess tonnage would result in shipping lines going under, but even if lines aren’t state owned, national pride still keeps them afloat. Just look at Hapag-Lloyd that was bailed out by a German consortium.
That the industry will have to transform is obvious, but how will it change? The Maersk CFO remained in noncommittal mode. “Clearly, the industry has to change or transform, and this will take different twists and turns depending on whether the carrier is government-run, or has private investors,” he said.