Overcapacity Crisis In Global Shipping Leaves NZ Vulnerable

- Alastair Reith

Communications Officer, Maritime Union of New Zealand

2016 was terrible for the shipping lines. According to JOC’s Container Shipping Outlook: How Shippers See 2017, global container carriers lost approximately $US13 billion in 2016. It is important workers understand this, because when the big corporations have problems they will try to share them with us. Our contract negotiations do not take place in a vacuum. They are inseparably linked to the state of the industry as a whole, and with the shipping lines determined to make back their money they are likely to aggressively cut costs. In the mind of the boss, that’s all we are – a cost.

Origins Of The Crisis

Furious competition drove freight rates down to rock bottom levels in 2016. Ryan Petersen of Flexport claims it was cheaper to ship goods internationally in 2016 than at any other point in human history. “As of March 2016, it costs around $US400 to move a 40-foot container from Shenzhen to Rotterdam, which is barely enough to cover the cost of fuel, handling, and Suez Canal fees,” he writes. 

“Here’s some more context. Let’s say that you want to travel for a year; it’s cheaper to put your personal belongings in a shipping container as it sails around the world than to keep it at a local mini-storage facility”. Great news for people paying to send containers from A to B. Not so great news for the shipping lines charging to carry them. Why did this happen? If you’ve worked at sea in recent years the answer was right in front of your face. Ships are getting much, much bigger. 

Bigger Is Better, For Some

As recently as the 1980s the biggest carrier ships in the world could carry about 8,000 TEUs (twenty-foot equivalent units – one TEU is one container, but the weight varies). MAERSK’s Triple E class ships now carry over 18,000 TEUs, and since the start of 2017 there have been five ships launched with more than 20,000 TEU capacity. The OOCL Hong Kong currently holds the world record, with a staggering 21,413 TEU capacity. 

We are entering a radically new and different era in global trade. The reasons for building bigger are simple. Supermarkets sell us a loaf of bread cheaper than the dairy on the corner. Average prices are lower, and some products are only going to show up in the large retailers. You can’t buy a $1 Homebrand or Budget loaf from Shalimar’s. It’s called economies of scale. Spread your expenses across larger volumes, and you lower your average costs. The problem with a good idea is everyone tries to do it. 

Race To The Bottom

In the early 2010s, the major carriers began a mega-ship arms race. Between 2011 and 2015 the global carrier fleet increased its overall TEU capacity from 15.4 million TEUs to 19.6 million. The container megaships take about three years to build and cost over $US150 million each. Once completed, these new high-capacity ships hit the water and massively increased the supply of container space. All they needed now were customers to import and export enough products for the shippers to fill their vessels and start making back their money.

More Capacity Means Less Profit

Freight prices reached historic highs around 2013, and the shipping lines made plans based on the assumption this would continue. Unfortunately for them, they miscalculated.  Demand never stopped growing, and it grew faster as 2016 went on. It did not, however, increase enough to meet supply. A combination of weak global gross domestic product (GDP), a slowdown in China’s economic growth, hoarding of retail inventories in the United States and evolving consumer spending trends left the bosses out of pocket.

Because of the short-sighted agenda of corporate decision makers, and the inherent failure of a competitive market system to see the bigger picture and plan rationally, the separate ship building programmes of each player came together in a perfect storm that drove down their prices and slashed their profit margins. No one wanted to be the only one not aggressively expanding TEU capacity, and everyone lost money as a result. The Boston Consulting Group predicts a 30% increase in container shipping capacity by 2019. Despite the 2016 crisis, larger ships continue to be built in the hope that key global trade routes and a growing population will supply enough containers to fill them.

New Friends In High Places

To stock a ship of this size to full capacity requires an enormous volume of goods. The need for this, along with 2016’s financial pressure, has driven the big players to consolidate and form new alliances (some might say cartels). Before 2016, the four alliances were Ocean Three (UASC, CMA CGM, China Shipping), CKYHE (COSCo, K Line, Yang Ming, Hanjin Shipping, Evergreen), G6 (MOL, HMM, APL, Hapag-Lloyd, NYK Line, OOCL) and 2M (MAERSK, MSC).

Now there are only three: The Ocean Alliance (COSCo, Evergreen, OOCL, CMA CGM), THE Alliance (K Line, Yang Ming, MOL, NYK, and a merger of Hapag-Lloyd with UASC), and 2M unchanged with the two biggest companies, MAERSK and MSC. They must work together to fill their super-ships and make each trip financially viable. Together these three alliances control 77.2% of global container capacity, and 96% of the major East-West trade. 

Crisis Averted, But Not Solved

From the shippers’ perspective, 2017 saw some improvements on the year before it. Soren Skou, Chief Executive Officer of MAERSK, predicted the company would achieve a profit of over $US600 million. In 2016, by comparison, it suffered a $376 million loss. Time will tell how accurate his predictions are, but industry profits are no longer at rock bottom. The overcapacity problem was mitigated slightly by the bankruptcy of South Korea’s Hanjin Shipping in February 2017. 

While this is not enough to solve the problem, it was welcomed by Hanjin’s competitors. Mediterranean Shipping Company CEO Diego Aponte described his rival’s collapse as “positive for the industry. At least it opened the eyes of some of our customers to understand how shipping is important within their supply chain,” he said. There have been slight freight rate increases in trans-Pacific contracts, and it appears the trend is likely to continue. 

Shipping companies surveyed in the Container Shipping Outlook white paper were cautiously optimistic about their profits in the year ahead. Philip Damas, director of Drewry Supply Chain Advisors, believed Asia-Europe freight rates are likely to increase in particular. “Factors such as the higher price of fuel, the previously unsustainable level of rates, and the Hanjin bankruptcy are now weighing heavily on pricing,” he said.

Dave MacIntyre, writing in the New Zealand Shipping Gazette, argues this view may be overly optimistic. “The collapse of Hanjin gave the impression to many in the industry that the supply and demand balance had eased, along with record scrapping last year,” he wrote, referring to the research of Alphaliner analyst Tan Hua Joo.

“However, the capacity removed from the market when Hanjin’s vessels were idled has now been taken up again by rival operators, and in addition the introduction of 1.6 million TEU of newbuilds would more than compensate”. Mr MacIntyre went on to report that almost a third of the world’s container ship fleet is worth no more than scrap value. 

Can Ports Cope?

This raises the further problem that as older, lower capacity ships are scrapped, the trend toward vessels with a capacity over 18,000 TEUs is likely to reinforce mega-carriers as the new norm. Terminal operators internationally will need to adapt their facilities and processes to cope with 20,000 plus TEU vessels. From a port perspective, these ships are not necessarily more efficient. 

They can cause enormous backlogs of containers, and delay the servicing of smaller vessels. Even with advanced new technology, will port storage facilities be able to cope?  Inland ports and logistical hubs are the likely solution, and will continue to expand both here and around the world. Our union must organise these warehouses as an urgent priority, just as our American comrades in the International Longshore and Warehouse Union (ILWU) did in their Great March Inland of the 1930s.

We Need Our Own Fleet

New Zealand is a small country, with small ports too shallow or narrow to handle the Triple E Class or anything comparable. Furthermore, our volume of exports and imports makes a stop-over here unlikely to be economically viable. Our domestic shipping fleet is decimated after decades of Government neglect, and the short-sighted reliance on foreign shipping has left New Zealand operators struggling to compete. 

We are becoming ever more vulnerable to the whims of massive international corporations. At best, we can be held to ransom.  At worst, we could be removed from key trade routes entirely, and left scrambling to provide our own transport services without the facilities or trained workforce required. The Asia-Pacific region faces increased political instability, and is host to a dangerous military face-off between China and the United States. 

New Zealand and Australia are at risk of isolation in the event of global or regional conflict. Our fuel stockpiles are low, and it would not take long for us to run short of essential goods and supplies. New Zealand’s government needs to wake up and smell the coffee. The only possible way to guarantee independence and economic security for this country is to rebuild and protect a domestic shipping fleet, along both coastal and international routes. If we do not guarantee our essential maritime infrastructure, all long-term trends point to ruin. The time to act is now.


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