Logistics Quarterly Magazine - Volume 16, Issue 1, 2010

An Overview of Trends in the Maritime Sector

Container carriers have faced challenges that have proved nearly impossible to remedy. Here's an account of some seldom or never before seen practices that continue to be applied, such as the widespread use of slow steaming, a practice of running vessels at slower speeds.

By Patrick Bohan

IN 2009, most of the world's top 15 container carriers closed their books with immense operating losses. In some cases, the amount of red ink involved was in the area of a billion dollars and involved most of the largest carriers in the world rankings. The year showed a remarkable downturn in container volume in all the major mainline trades. This was characterized in North America as roughly a 20 percent falloff in volume versus 2008 levels. Early signs in 2010 point to a recovery of volumes with some signs that shippers are now finding capacity harder to find while rates show steady escalation.

During the great recession of 2008-09, while experiencing the steep fall in business volumes, container carriers were in the situation of taking delivery of new, larger vessels ordered at the height of the economic expansion. With the amount of expanded carrying capacity that was now available, and the sudden scarcity of container freight, the result could only be a widespread deterioration of ocean freight rates. This left container carriers in a challenging lossmaking situation that proved nearly impossible to remedy, although a variety of seldom or never before seen practices were implemented.

One of these behaviors was the widespread introduction of slow steaming, a practice of running the vessels at less than capable speed in order to slow the amount of bunker fuel burned in a round trip voyage to economically optimal levels. Carriers were able to point to both a business and an environmental case while instituting a practice that effectively removed real carrying capacity from the marketplace. With the amount of ships the carriers had to work with, it was easy to add ships and even add port calls and maintain a weekly frequency with newly extended transit times. A large part of this behavior was of course encouraged by the prevailing, relatively high prices for fossil fuels.

Another new practice in cost management was sailing around the Cape of Good Hope in the south of Africa to economize on Suez Canal tolls. This practice also served to add incremental days to a typical round trip voyage and managed the amount of dollars that a shipping line would turn over to outside agencies like the Suez Canal Authority while once again removing capacity from the marketplace.

The major carriers laid up vessels, returned chartered tonnage to the owners, deferred and delayed new building deliveries, collapsed strings of overlapping services, sent aging vessels to the scrappers, and negotiated bridge financing and other financial measures throughout the year to avoid bankruptcy.

The delay tactics have appeared worthwhile because signs of economic recovery in late 2009 and early 2010 suggest that the worst may now be over for the carriers. Most observers of the industry believe the climb back to profitable operations is underway. Shippers are seeing the signs as well, evidenced almost daily as general rate increases are being announced in all of the major trades.

In the coming years we may see further industry consolidation and some renewal or restructuring of the major global alliance systems in the aftermath of 2009 to deal with the global operating reality. Larger vessels will continue to be introduced into the major global trade routes and it is expected that the east coast of North America is one port range where these changes will become even more evident. In the short term, it is widely expected that vessel size on the east coast will leap through the 6,000 TEU threshold into the 7,200 to 8,000 TEU vessel size at the upper end. In early 2010, MSC has been testing some vessels of this size on the U.S. east coast.

Factors such as canal tolls and fuel prices will be continually traded off against transit times as carriers and shippers seek to find the right balance between freight rates and service. By 2017, the completed expansion of the Panama Canal will make the deployment of 8,000 TEU + vessels possible on gigantic around the world conveyor routes connecting Asia - the Gulf and east coasts of North America with Europe, the Mediterranean and the Middle East back to Asia.