There is unfortunately another update to the condition of severe overcapacity and the resulting market and shipper dynamics involving the ocean container transport industry.
Industry leader AP Moller-Maersk has according to a recent Wall Street Journal report, kicked off a new “arms race” in ordering 20 new triple-E container vessels valued at $3.8 billion. These ships can carry upwards of 20,000 20 foot containers and according to statements from Maersk, will consume 35 percent less fuel consumption per container than the current standard 13,000 container vessels scheduled for delivery to other shipping lines.
Of course, one has to wonder about the marvelous math of spreading savings across roughly 54 percent of additional capacity at a standard list price contract shipping rate. In that light, the WSJ reported that the decline in ocean container freight rates in the past six months was three times as fast as in 2011 when a previous price war broke out among the leading carriers. All but seven of the largest shipping lines have lost money in 2012 according to a reported analysis by Alphaliner. The WSJ noted that last month, Maersk CEO Soren Skou warned that the industry is on the verge of another price war unless excess vessels are not taken out of service, especially on the Europe-Asia corridor. Freight rates in that sector alone dropped by 6.5 percent according to the latest Shanghai Containerized Freight Index.
The industry paradox of big-bucks chicken now enters yet another chapter. Industry leader Maersk obviously wants to continue to initiate an industry advantage by investing in even larger ships. This will obviously precipitate other responses from existing lines, and the spiral of gross overcapacity could carry itself way into the future unless the industry comes to its financial and operational senses. More mega-ships equates to needs for even larger and more efficient port facilities. In the past six months, labor disputes involving U.S. west and east coast ports, as well as the most recent Port of Hong Kong, centered on, among the usual wage issues, calls for increased port efficiency and automation needs.
As freight rates continue to soften in 2013, container carriers will incur more severe financial challenges. Adding new long-term financial commitments for even larger ships adds more burdens not only for the shipping industry but for global logistics infrastructure.
Something has to give, and when it does, it will not at all be attractive for the industry. Large global shippers and global product sourcing professionals can currently bask in the current eroded freight rate environment but had better be aware of the longer-term implications that will invariably occur.
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