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Cut the blame game

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As Covid-19 takes its toll on global economy and stagnates social activities, container shipping lines, as an inseparable part of global supply chains, are making their own contribution to supply-chain recovery.

But blame for the skyrocketing transpacific freight rates unexpectedly fell on shipping lines, catching them off guard, because some cargo owners implied rate hikes in the tradelane were deliberately orchestrated by carriers who intentionally restricted capacity and planed blank sailings way more than needed.

It is not that hard to imagine how the accusation made carriers feel since a charge of profiteering is nothing people can take lightly, especially after everything they have done to please their customers during the hard times when medical supplies and personal protective equipment are maneuvered on container ships around the world with livelihood for millions at stake.

When it comes to delivering social responsibility tackling Covid-19, shipping enterprises with government background in China played an essential role in combating disruptions brought by the pandemic, while favorable terms for box, customs clearance were introduced for shippers’ convenience.

From the perspective of capacity management, major carriers played the blank sailing card only in line with the fall in demand to maintain a fragile balance of supply and demand when world economy was stalling and reduce blank sailings sharply as the worldwide recovery in demand is now underway.

The Covid-19 storm sure can be weathered, at least to some extent, only if market players decide to stick together, and turning to finger-pointing long before the crisis is over is arguably more devastating.

Uncertainties surge and inability to accurately forecast

The timing could not be worse. transpacific market in particular bears the brunt of piling up uncertainties which adds up to the mist that thickens on the outlook of US-China relation for more than a year. The tension between the two economies escalates under the impact of Covid-19, and makes it mission impossible to forecast trade volumes by themselves, leaving carriers with no choice but to act more cautiously and seek the advice from external specialist forecast.

Covid-19 outbreak and its rapid spread in the US drastically dampened transpacific market needs. It would be none other than common sense among carriers to play on the supply side to balance falling demand with reduced capacity and that’s exactly where the tool of blank sailing shines. When the count of blanked sailings was at its peak with eastbound capacity slashed by 17%, market demand was projected to shrink by 16%.

To wade through the muddy water of Covid-19, the logics behind carriers’ behaviors are simple and clear:

  1. Bring capacity back in pace with demand recovery to keep a somewhat sustainable balance between supply and demand which has a direct bearing on customer experience and of course their feedbacks.
  2. Avoid abusing blank sailing as market share-grabbing strategy is still of great importance to carriers when their competitiveness and market influence heavily depends on it, an overuse of blank sailing is tantamount to quenching one’s thirst with poison.

Therefore, it’s a logical no-go for carriers to perform blank sailing more than necessary and on the contrary, with more factories around the world getting back to work and demand for container shipping services starting to rebound, carriers are proactively adding sailings back in.

Indeed the number of blank sailings in the first half this year far exceeds that in 2019, but since May when a universal decision was taken by governments to ease Covid-19 lockdown measures phase by phase, a downward trajectory in blank sailings had been witnessed across all trades and more than that, temporary sailings were added to meet the better-than-expected need in eastbound transpacific. By early July, transpacific eastbound capacity had grown back to the proximity of 460,000 teu per week, the same as last year, and is expected to exceed the same period last year by early September.

Look at the whole picture and downward risks

The accusation of profiteering comes from a misinterpretation out of context. There’s no denial to the fact that trans-Pacific freight rate is at its historic highs, but the spike in spot rates is more likely to be temporary since as mentioned before, carriers are aggressively cutting back on blank sailings and also an exceptional case because when accusers fan the flame of questioning carriers’ integrity, they seem to have ignored the plummeting freight rate in Europe where a 20% fall was recorded by the end of July and namely historic lows in Persian Gulf trade and Latin America where spot rate plunged by 30%.

Oil price are coming back, chipping away cost benefit for carriers. Oil price has been on the up since April, and reached $45 (Brent) by Aug. OPEC+ launched deep production curbs since May by a record 9.7 million per day after covid-19 crisis destroyed a third of global demand. Although the pace of recovery in oil prices is expected to be moderate, there’s still plenty space for it to grow.

With both factors plus the background of a deep economic contraction this year, carriers’ profitability for the year of 2020 is on an extremely rugged road.

Liquidity risk arises, the lesson from Hanjin drama should never be forgotten. Covid-19 dragged global consumption down to freezing point, and liquidity risks mount as economic activities get stuck in limbo throughout the first half this year. Carriers who have not yet fully recovered from financial crisis is struggling to maintain adequate headroom to sail through troubled waters. Once the hard-won balance of supply and demand is broken, by either irrational capacity management or radical pricing policies, their financial performance will be doomed to failure.

Governments have introduced supportive schemes since Covid-19 outbreak, to improve carriers’ cash positions, another proof of the hardship they are dealing with. CMA CGM is poised to receive a $1.14bn state-guaranteed loan from French authorities; South Korean government decided to provide KRW1.25trn in emergency funding to shipping industry, with KRW470bn earmarked for HMM; Taiwan has implemented a NTD30bn aid package targeted at Yang Ming and Evergreen. Not to mention, Pacific International Lines (PIL), the troubled firm that has sold series of containerships and its Pacific Islands liner shipping business PDL.

The Hanjin Shipping  drama could still send a chill down one’s spine nowadays, and its rippling effect was felt beyond the industry. As the virus keeps narrowing carriers’ breathing space, a reasonable mind shall put a halt to any short-sighted blaming games. A healthy and sustainable development of container shipping industry concerns not only carriers, but a far wider range of industry players.

Contributed by Ji Quan

The views and opinions expressed in this article are solely those of the authors

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