Friday, May 4, 2012

That Sinking Feeling

Awash in high capacity amid low demand, ocean carriers see rate hikes as lifeline.

Sinking in red ink, ocean shipping carriers are attempting to stay afloat by raising container rates and cutting capacity, reported the Journal of Commerce.

Denmark’s Maersk, the world’s largest container ship line, with approximately 15 percent of the global market, announced they expect a “negative result in 2012,” on top of over $600 million in losses in 2011. “The situation is just not sustainable,” said Maersk Line CEO Soren Skou.

China Cosco Holdings, Asia’s largest container shipping company by capacity, booked a loss of $423 million for the first quarter of this year. Volume jumped 20 percent, but revenue increased just two percent, highlighting the challenges faced by ocean carriers in a time of tepid growth in demand and rising capacity. China Shipping Container Lines, the second-largest Chinese carrier, lost $229 million in the same quarter.

While the carriers are announcing rate hikes to offset the losses, they may not be able to make them stick, with capacity continuing to far outstrip demand. In the past, the shipping lines have also responded to low demand with “slow steaming,” saving fuel costs and effectively cutting capacity by tying ships up longer on a given voyage, while delaying delivery of their customers’ goods.

The ocean carriers will be further challenged by the expected delivery of 103 new ships during the course of 2012. This includes 55 ships with a capacity of over 10,000 TEUs (twenty-foot equivalent container units) each, and adds over 1 million TEUs to an already cluttered market. This seesaw of additional capacity being brought into the market, coupled with desperate attempts to recover revenue and profitability, is a key factor contributing to the volatility of ocean rates over the last few years.

Maersk CEO Skou said customers value reliability over price, pledging to continue the company’s newfound pricing discipline and “change the dynamics going forward.” Before you spend too much time feeling sorry for the shipping lines, remember Maersk did earn a record profit of $2.6 billion in 2010.

Note: This “Extra Mile” message is number three in a series looking at various factors of international sourcing choices for U.S. manufacturers and importers. For a link to the first and second pieces, “South of the Border” and “All Your Egg Rolls in One Basket?” click here: or here:

Kirk Shearer

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