In the parallel universe occupied by container shipping lines, the steep rate hikes are unrealistic and a desperate attempt to raise profitability before signing annual contracts.
Can you imagine being the CFO responsible for presenting a container shipping line’s annual results? Standing before the Board you mumble something about the “cyclical nature of the industry” and then attempt to explain how you managed to turn a $500 million profit one year into a $500 million loss the next.
The problem, of course, is that everything associated with the container shipping business is volatile. Freight rates fluctuate wildly, the oil price goes up more often than it comes down, a shortage of skilled seafarers pushes salaries up and capacity regularly outstrips demand. Not to mention having billions of dollars of assets amortising away. It all makes accurate forecasting almost impossible.
How on Earth do you run a business effectively under those conditions? Obviously you don’t because you can’t.
As annual contract negotiations approach on the transpacific, the carriers are determined to improve their profitability and lock customers in for the next 12 months at higher rate levels. Good luck with that.
Asia-North Europe and the Med were the first major routes to be whacked with hefty rate increases but Transpacific Stabilisation Agreement carriers have also jumped on the bandwagon, seeking to raise rates by 40 percent. The TSA wants to hike rates by $300 per FEU on March 15, followed by $500 per FEU to the West Coast and US$700 an FEU to the East Coast a couple of months later.
That will be on top of the current rate of $1,800 per 40ft box from Shanghai to the West Coast.
TSA boss Brian Conrad warns that if the lines achieved only marginal increases in rates they would be setting themselves up for losses for the next 18 months.
The thing is, the TSA does this dance every year before contract negotiations begin with shippers. It is a familiar approach by the carriers that is treated by their customers with great circumspection. And carriers are in a weak position, undermined by excess capacity and rock bottom rates.
Sure, those freight rates are unsustainable at the current levels and shippers understand that they need to be raised. But with the US economy stuttering along with very little growth, how can the lines justify increases of such magnitude? The mood was summed up in a text message we received earlier this week from an incredulous shipper: “GRIs WTF!”
Cargo forecasts for the transpacific aren’t expected to break any records this year, but with inventory levels low after the holidays and good post-Christmas sales, shippers believe there may be a surge around mid-year.
It is probably too much for the carriers to expect a profitable 2012. But in the back of every CFO’s mind as he winces before the barracking Board members is the knowledge that his line has the ability to make a billion dollar turnaround before his next results presentation is due.