Speed of change in ocean shipping is accelerating

Gary Ferrulli, president-North America, Unicon Logistics | Dec 11, 2015 8:51AM EST

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Gary Ferrulli

Container vessels used to be built for a life at sea of 25 years, sometimes longer. Today, carriers are scrapping ships less than 10 years old. Freight rates used to change with 30 or 90 days’ notice, and service contract rates were good for a year. Now you have a nonstop negotiating period, and rates change weekly in major trades. Constant change is the new norm, and the speed of change is accelerating.

I’m amazed at the wild swings the industry is going through in a relatively short period of time, a series of weeks within a single year. A year ago, we were on the verge of a U.S. West Coast port shutdown, and shippers and carriers were scrambling to get equipment and space to move cargo that couldn’t be moved. There isn’t enough space and equipment in the rest of North America to handle those volumes if there are congestion-related problems or a slowdown on the U.S. West Coast.

In a matter of weeks, spot rates went through the roof. A year later, vessels to the U.S. are operating at less than 90 percent utilization, and spot rates are at rock bottom. U.S. East Coast rates today are hundreds of dollars lower than U.S. West Coast rates of a year ago, and at record lows — until next week, when there will be another chance to lower them.

Last year at this time, pictures taken of East Coast port operations showed what looked like giant parking lots of trucks, waiting ... and waiting. In late October this year, I visited a major terminal in New Jersey whose management told me that volumes were down more than 20 percent year-over-year in September and 15 percent in October. Sure, there were some trucks backed up, but no long lines. The market seemingly dried up right in the midst of what is normally shipping’s peak season. 

First-quarter 2015 earnings were good, with most carriers making money, and some even reporting record levels. The second quarter was even better from a carrier standpoint, with some noise being made about possible record earnings. But a lightning bolt hit most carriers in the third quarter, with many returning to the red.

Can the fourth quarter be any better? It’s unlikely, but it’s possible with some skipped sailings and full strings being removed, and an attempt at capacity management could help. But I don’t think it will be enough to offset declining volumes and rates.

Maersk Line in November said it will reduce headcount by 4,000 over a two-year period. That’s 17 percent of its staff. Many, I am told, will be those ready to retire, and many others will be offered packages to retire. Quickly, there was speculation on how others would follow Maersk’s lead and lower their own costs.

Maersk says much of the impetus for its decision is the company’s movement toward automating shipment data that flows through the carrier’s booking and documentation systems, long tried by a few in international transportation with only a modicum of success.

In U.S. domestic commerce, more than 80 percent of shipments are handled this way, saving companies a lot of money and grief in having far fewer errors. The international side hasn’t gotten that far, but there’s no reason not to move in that direction.

Only two months ago, there was speculation on the sale of NOL-APL, but it was quickly quashed as majority owner Temasek apparently  didn’t think it would be able to bring a high enough price. On the heels of APL’s reported $96 million third-quarter loss, however, word emerged that CMA CGM and NOL are engaged in exclusive negotiations on a possible NOL-APL sale.

A China Shipping-Cosco merger also appears to be getting close to fruition, with discussions having occurred with the FMC. That’s bringing about speculation on what will happen to alliances. One European source in essence says there will be no Chinese presence in the CKHYE, or the new KHYE. Anew G6 also would emerge, with APL leaving and Hamburg Sud replacing it. Other changes also would have to occur.

For those who like stability, predictability — and I would think that in business most of us would — this just isn’t in your comfort zone. And from all outward appearances, stability won’t exist for a couple of years. As far as my belief that only 10 carriers will control 90 percent of container capacity and move 90 percent of the cargo by 2022, I may have been overly optimistic on how long it would take.

The speed of change is here, and it will be a while.