December 8, 2016 Leave a comment
Former Lloyd’s Shipping Economist contributor Andrew Craig-Bennett has written, in Splash24/7, one of the best thought pieces on the state of liner shipping. I have reproduced the article below, but it is worth following the link to the comments, too.
The liner revolution eats its children – Splash 24/7
Answer: liner shipping.
There are two possibilities: either the directors on those boards have the brainpower of jellyfish, or they thought they had a cunning plan.
The cunning plan was to cut their unit cost of manufacture of their product, carriage by sea for ISO containers, by building ever bigger ships and gaining economies of scale, to the point where competitors would just give up and get out of the business, at which point the last men standing, one of whom would be Danish, would jack the rates back up again and, combining their low unit cost with quasi-monopoly control, they would become immensely rich.
The cunning plan looked quite good to start with.
Ever since Temasek gave up on Neptune Orient Lines, and particularly since the Korea Development Bank threw in the towel and stopped propping up Hanjin, liner companies have been merging.
When businesses merge, it is said that the devil is always in the detail. The grinding of the gears that accompanies a merger makes the merging businesses less efficient for a while. Certainly this is true of those mergers which are brought about, not by the ability of the acquiring company to pay more for the target company than the target company’s shareholders think it is worth, but by what is politely known in East Asia as ‘administrative guidance’. These mergers never happen when times are good, only when times are dire, and they are accompanied by the gentle tinkling sounds of breaking rice bowls.
So far, so good for the cunning plan.
The liner shipping industry is experiencing the fate that some of us predicted for it when Directorate-General IV of the EU Commission hearkened unto the European Shippers’ Councils and decided that conferences were a bad thing. The upshot is likely to be that the world is left with perhaps half a dozen ‘full service’ containerlines, plus a number of regional trade liner companies sitting more or less comfortably in the niches that they have carved out for themselves.
This makes life particularly grim for the smaller fry; the multitudes of private and family companies, often highly geared, who are owners of tramp boxboats. Just a few years ago, these people thought they had found the golden ticket – all they had to do was to order bog standard boxboats, man them with warm bodies, and charter them to the big liner companies, who were no longer much interested in the dull business of running ships. Which was fine until the big liner companies built behemoths.
Today, the tramp containership owners are starting to discover what it was like to be an independent tanker owner in 1983… the year in which Elf Aquitaine scrapped the world’s second biggest ship, the ULCC Pierre Guillaumat – named after their chairman – at six years old. Who wants a panamaxboxboat, now?
Meanwhile, the next part of the cunning plan, seen by the staff of the big liner companies as ‘The Good Bit’, comes into play, as the surviving giant containerlinescan at last do what their staff have wanted to do for decades, and put the bite on the forwarders, by jacking up their rates and shutting them out.
But the problem with the cunning plan rears its ugly head. Owners of unwanted tramp boxboats can either scrap them, at tender ages, or do something else with them, just at the time when big forwarders, controlling worthwhile cargo volumes on certain routes, find themselves shut out.
The solution is obvious and not even difficult to put into effect– Non-Vessel Operating Common Carriers become Vessel Operating Common Carriers, by chartering ships, cheap, from the desperate tramp owners. The NVOCCs know all about the liner business; all they need to do is to hire a few operations people, appoint agents, and buy bunkers.
Presto! A whole new generation of liner shipping companies, carrying negligible debt or overhead, springs up like the dragon’s teeth and starts to out-compete the ‘legacy’ big shipping lines.
And thus the container revolution eats its children. Amongst the legacy liner companies, few are very old. They saw off the old guard of the conference carriers – even the boys in blue were once ‘tolerated outsiders’ – and soon they, in turn, will be swallowed up by, in effect, ‘virtual’ liner companies.
Who loses in this orgy of value destruction? At first glance, the banks, but the banks are bailed out by the taxpayers. Which is to say, gentle reader, that the people who lose are you and I.