Can shipping buck the global economic trend?

Compared to just a year ago, shipping rates are much higher than they were. Shippers and customers alike will benefit in the long term from having a more stable industry. But how can this be the case when capacity in the industry is still growing relative to demand?

The economic backdrop is not good. Growth is almost non-existent within Europe, with some countries in recession and the outlook being continuously downgraded. The USA doesn’t fare much better, with growth rates of some 2 percent. Even China and India have had growth forecasts revised downwards, with the IMF’s July report reducing forecast growth for 2012 by 0.2 and 0.7 percent respectively, compared to April estimates. The consensus is that the global economic outlook remains uncertain.

Low growth means a lowering of global demand for goods and services which, in turn, means less of a need for transportation services for those goods. Year on year volumes in Q1 2012 actually fell by almost 4 percent.

In July, Bill Mongelluzzo said in the Journal of Commerce that “when carrier capacity is increasing 2½ times the growth of cargo volume, shipping lines are usually in no position to increase their rates, and certainly not five times in eight months.”

So how can it make sense that rates are increasing?

“Shipping companies, including Maersk Line, deploy their assets in a different way than in the past. For example, in order to reduce our bunker consumption we have added vessels to a number of services and are thereby able to slow steam more. At the same time, we are using more vessels whilst actually leaving deployed capacity in the market unaffected. In addition, the industry has increased the idling of vessels where it doesn’t make economic sense to have them in service,” says Morten Engelstoft, Chief Operating Officer at Maersk Line.

“So whilst, nominally, it may appear that capacity is increasing because there are more or larger vessels, this is not necessarily the case. This new approach comes from a realisation that the huge cyclical losses of the past are just not sustainable.”

This view is borne out by other commentators, with the TSA (Transpacific Stabilization Agreement) spokesman Niels Erich being quoted in the Journal of Commerce as saying: “The TSA’s 15 member lines are maintaining vessel utilization rates of about 90 percent, with the busy lanes … operating at 95% or higher utilisation.”

In essence it appears that shipping companies can influence the markets, if each one acts rationally to maximise its own profitability rather than chasing loss making volumes.

 This strive towards greater stability in the industry will lead to a more consistent service to customers, and better shareholder returns.