2015 Holiday Peak Season Has Ocean Carriers Seeing Red

After a busy 2014 and first quarter of 2015, ocean carriers are having a very unhappy holiday peak season.  Poor bets on future economic growth, new infrastructure, increased vessel capacity, and importer inventory trends have created a shipping environment with excess supply and dwindling demand.

How did the shipping industry, which was enjoying record profits and high vessel utilization ratios only a few short months ago get into such a state of affairs? And most importantly, what impact will this have on both importers and exporters? Let us break down the situation by looking first at the demand factors that have led carriers to compete over a shrinking pie of business.

The Incredible, Disappearing Demand

The story of reduced demand actually has its origins in the sky-high rates of 2014 and early 2015.

Concerned about the long-term impact of the labor slowdown, and perhaps by the anticipated rise in interest rates later this year, demand planners across the country increased their “safety stock” and marketing departments cut back promotional calendars in an attempt to mitigate the effects of the supply chain disruption. According to some estimates, safety stock ratios for shippers are now at their highest levels since 2009. The implications of these decisions are still being felt by both importers and the logistics industry.

According to a survey conducted by Wolfe Research (Paywall), nearly half of shippers stated that their inventory levels in the third quarter of 2015 were higher than the third quarter of 2014. This high level of inventory has lessened the need for additional stock for the holiday season, translating into a reduced demand for international freight services. The same survey from Wolfe Research noted that over twenty percent of shippers surveyed intended to ship less in the fourth quarter of 2015, the highest percentage in three-and-a-half years.

The softening for demand of international freight services is also driven by reduced global demand. Anemic growth in the U.S. and EU coupled with cooling emerging markets, like China and Brazil, has meant that many consumers and businesses are buying less. Combined with high safety stocks, the demand for additional product becomes minimal, at best.

Sky-High Supply

A drop in demand would have less of an impact on carriers if capacity was not reaching record highs and there were more solutions to reduced profitability were more limited. In search of greater future profits and driven by the expansion of the Panama Canal, carriers have invested heavily in mega-vessels of over 16,000 TEUs. While these ships may offer cheaper costs per TEU, the price to manufacture and launch are extremely high and greater vessel utilization is required to keep mega-vessel services profitable.

In an attempt to justify the introduction of significantly larger container ships, carriers have tried to cull older and less-efficient vessels, but options have been limited. Vessel-Sharing Agreements (VSA) between carriers are relatively new and help to efficiently allocate assets by pooling resources with other carriers. However, the agreements have also made operations significantly more complex and reduced carrier’s flexibility to pull ships from under performing routes due to contractual obligations.

Meanwhile, the same low commodity prices, driven by global economic cooling that resulted in reduced bunker fuel costs and higher profitability for the carriers, have led to lower steel prices. This has made the option of scrapping older vessels much less attractive, forcing carriers to make a decision between continuing to run unprofitable and outdated ships or taking write-offs on older vessels and pulling them from rotation. Furthermore, any of these limited options negatively impact carrier’s balance sheets threatening the competitiveness of smaller carriers vis-à-vis the 2M (Maersk and MSC) VSA and present serious financial issues for publicly-trading carriers.

The Ugly Result

The threats to profitability have resulted in a swift change in fortunes for carriers. In the last week alone, the largest carrier, Maersk, announced a 60 percent drop in their profitability and an onshore workforce reduction of about 4,000 employees.  The industry is seeing great ramifications; two major Chinese state-run carriers-COSCO and China Shipping-hinted at a merger and the unfortunately-timed IPO German carrier Hapag-Lloyd raised $300 million, instead of the initial valuation of $500 million, following a series of deep revisions. Attempts by the carriers to halt the bleeding through peak season surcharges and GRIs have been met with limited results.  Shippers and forwarders have continued to push back, refusing increased rates and pointing to limited demand and excess capacity.

Opportunity & Adaptation

For both exporters and importers, the current market offers significant opportunity to move international freight at extremely low rates as other shippers continue to draw from their safety stock. Shapiro customers should know that we are proactively addressing today’s shipping landscape. Our forwarding teams are working tirelessly to keep abreast of these developments and to ensure that we are pushing our partners for the lowest possible rates in this shipper’s market.  While it is not easy to amend fixed-rate and contract deals signed and executed in April or May, we are doing just that.  Additionally, we are aiming our resources at the spot rate market and forging new alliances with carriers willing to offer highly competitive rates for comparable services.

For shippers using other forwarders, use this new found information to inform your decisions and to ensure that your forwarders are aware of these market trends and are working to provide you with the best possible logistics solution.

If you are interested in forging a relationship with a different kind of freight forwarder, request a quote from us to see how “We deliver. Problem solved.”

-- Devin Turner
Senior Global Logistics Specialist