Instead of adding capacity, container carriers should be working together to find long-term solutions to the industry-wide capacity glut conundrum.
Two of the world's largest sea shipping companies, CMA CGM SA and Cosco put more mega container ships to sail, despite the rising rates and shipping capacity glut.
All told, CMA CGM recently added transpacific shipping routes between China, served by six mega-ships with 18,000 twenty-foot equivalent unit (TEUs) capacities. Cosco in 2015 announced it was investing $1.5 billion in 10 mega ships. Other sea shippers have recently made similar moves to put more container ships into service.
CMA CGM's and Cosco's decisions to add shipping lines and ships to their fleets were arguably based on rational motives. Their goal was to recoup widening losses by making the most of their existing shipping line services and to put very large vessels into service to save money by packing more containers per ship.
Figure 1: Container shipping, which is used to distribute over 95% of all goods worldwide, has seen weak growth for more than a decade.
However, adding more capacity to a bloated industry is categorically not a good idea, Jock O'Connell, an international trade economist for Beacon Economics, told EBN. Instead, container carriers should be working together to find long-term solutions to the industry-wide capacity glut conundrum. If anything, the carriers' ill-conceived initiatives reflect desperation and will likely cause additional problems in the land- as well as sea-based supply chain, O'Connell said. "I have said it before and will say it again: the shipping industry has become totally unhinged from the rest of the world's supply chain," including land-based transportation, O'Connell told EBN.
A thread of logic
Container shipping, which is used to distribute over 95% of all goods worldwide, has seen weak growth for more than a decade. Europe's financial crisis and economic sluggishness followed more recently by a slowdown in growth in China, have further negatively affected the industry, indirectly accounting for an even larger capacity glut. Many carriers had predicted that the world economy would return to an upswing by now and bet big by investing in additional fleets, thus adding to their losses.
"Carriers think they need to utilise their mega ships because they sunk billions of dollars into those assets. No shipping line executive is going publicly admit making a terrible blunder, by misreading the market," O'Connell said. "Now they are stuck with these very large ships and must find some way of utilising the capacity in order to minimise their losses and not to make a profit."
Consequently, pricing has plummeted, which is, of course, good news for those firms paying for sea transport and bad news for carriers and ship builders. According to analyst firm Karatzas Marine Advisors, the average pre-downturn price to ship a container from China to Europe, for example, plummeted to $500 per container, compared to $1,500 to $2,000 per container before the downturn.
According to UK-based analyst firm Drewry, the index rate for container ships continues to plummet. "The World Container Index's composite index is now 60% lower than the average of the past five years and has decreased by 62% in the past year," Richard Heath, director of Drewry world container index, recently wrote.
Collateral damage to the supply chain
Shippers increasingly seek to cut their losses by packing large ultra-large vessels, often with 18,000 TEU capacity, with large quantities of containers. However, the arrival of these very large ships poses problems for other supply chain partners outside of the carrier industry, O'Connell says.
"The danger to the rest of the supply chain is the connective tissue of land-based transportation facilities that link the ports in North America," O'Connell said.
In the U.S., ports are not accustomed to handling 18,000 TEU vessels with loads of 10,000 to 14,000 TEUs that are "dropped on the docks all at once" instead of handling a more gradual flow of good coming in on smaller ships. "The danger is that the arrival of these ultra-large ships so soon could very well break ports," O'Connell said.
The only solution
An alternative to the crisis is that the shipping industry works together to at least limit or even reduce capacity. They can do this by scrapping ships or putting ships in dry-dock ahead of their scheduled lifecycle. If action is not taken, the capacity glut will only get worse. However, carriers will not necessarily be able to form such a pact that might reduce capacity.
"The only alternative is to reduce capacity and that becomes a game of chicken between the respective carriers," O'Connell said. "Who is going to make the first decision to lay up ships? They collectively need to reduce capacity, but who is going to do it?"