One-way trade negates rate-rise gains
Shipping lines may be enjoying soaring freight rates but the increasingly one-directional nature of world trade flows means much of the benefit is not going to the bottom line.
A series of freight-rate rises has bolstered revenue in the notoriously cyclical industry but margins are being squeezed due to a widening mismatch in trade between Asia and the United States and Europe resulting in half-empty loads on return journeys.
Mark Page, director of global shipping consultancy Drewry, said as a result 20.5 per cent of boxes handled at the world's ports last year carried no cargo.
'We estimate the cost to the shipping lines for moving those empties to have been about US$19 billion, or about 17 per cent of their income,' Mr Page told delegates at the Terminal Operating Conference 2004 in Singapore.
On the transpacific route, cargo from Asia outnumbered return leg volume by a margin of 2.2 to one. The same trend is being seen in Europe where the mismatch shows up in a ratio of 1.7 to one, driven by an increasingly powerful euro.
Worryingly for the carriers the trend shows no sign of correcting despite China's rapacious demand for imported raw materials and foreign consumer goods by a highly acquisitive middle class.
Maersk Sealand chief commercial officer Peter Frederiksen said round-trip revenue on the Pacific had declined almost 7 per cent since 2000.
Then a round-trip voyage between Asia and the US generated about US$25,000 in revenue, with five boxes having to be repositioned empty back to the manufacturing heartlands, he said. Last year, the same journey was returning $23,000, with the carriers paying to ship six empties back.
Mr Page said there was no sign of the situation changing. 'I would suggest that the imbalances are here to stay and the carriers are going to have to learn to live with them,' he said.
Carrier executives said they would look to increase freight rates, especially eastbound across the Pacific, but they had only limited success in gaining the first tranche of a planned US$900 per box increase.
Other options include cutting operating costs, better forecasting and more effective equipment usage through alliances with other carriers.
Mr Page said the issue also highlighted the waning benefits of shipping alliances. Three of the top five carriers in terms of capacity operated as independents.
'The alliance concept is somewhat fraying at the edges. If [Mediterranean Shipping] Evergreen and Maersk can all apparently find it possible to operate profitably as independents, how long can it be before the larger members of the existing alliances follow suit?
'The Grand and New World alliances are almost seven years old, which by industry standards makes them eligible for the gold watch,' he said.
The industry and the analysts who watch it have traditionally been poor at forecasting the crest of the peak, or the depth of the next depression, making fleet management less than effective.
Ron Widdows, chief executive of American President Lines (APL), the NOL Group's container shipping arm, said: 'We have never got our predictions right, not even close. [The industry's] tendency to equate this into business plans may explain some of the problems we've had in the past.'
NOL Group last month revealed the volatility of the container trades when it turned 2002's net loss of US$330 million into a record $335 million net profit after exceptional items.
But Mr Widdows said there was a limit to cost cutting. 'At APL, our turnaround was more a factor of how we addressed our cost issues than the increase in rates. But there is a point at which you cannot reduce anymore without impacting your service quality.' Most agree, however, the future looks bright on a two-year horizon.
With shipyards crammed with orders for new vessels - tonnage representing about 40 per cent of the existing fleet awaits delivery - consultant BRS Alphaliner projects a comparative 9.9 per cent jump in nominal capacity this year, and 11 per cent next year.
Such an expansion matches closely with Drewry's demand forecasts for an 8.4 per cent expansion this year and 10.2 per cent next year, numbers that underlie industry optimism.
When demand exceeds supply it allows carriers to charge more for their transport services, but does little to address the growing cost of a widening trade imbalance.