Back in January of this year I wrote an article fro LinkedIn Pulse called ‘Giving Robert Dreelan His Due’ (https://www.linkedin.com/pulse/giving-robert-dreelan-his-due-tom-o-malley?trk=mp-reader-card ). The subject matter between Robert and I was the impact of the ocean carrier alliances on shipping rates. My position was rates would stay down through expanded use of mega vessels, the alliances competing against each other, and keeping rates lean to grab market share would be the modus operandi. Robert on the other hand surmised rates would climb as ocean carrier alliances formed a type of cartel that could drive up, sometimes artificially, container rates.
As we approach the beginning of month number nine of the year, it turns out I wasn’t wrong. I don’t like being wrong so I won’t say it. I wasn’t wrong, I just wasn’t ‘as right’ as Robert Dreelan was. Shipping rates continue to be strong in most lanes and ocean carriers are actually making money. Even cyber-attack weary Maersk, who is still trying to calculate the total cost of the attack, is convinced they will have a $1 billion improvement in profit over 2016. Yep, the ocean carriers are getting fat and happy in 2017. The question is will the ocean carriers fall back into bad habits, such as creating too much capacity, which led them to the brink in the first place?
Impossible you say? I don’t think so. Individual people are smart; collectively in groups we tend to be sort of stupid. Given enough time we tend to make many mistakes over and over again. Some day there will be another housing bubble, the stock market will become over valued insuring a down turn, and sadly there will be more lives lost in future military conflicts. We can’t help ourselves because we are indeed stupid. Of course I can’t say with too much conviction the ocean carriers will shoot themselves in the foot again. Although it is at the very least possible the ocean carriers will repeat the same mistakes.
With the possibility of a repeat of the ocean carriers sabotaging themselves, and more importantly something that would make me even just a ‘little more right’, an article in the JOC caught my eye. The article https://www.joc.com/maritime-news/new-ship-ordering-spree-will-threaten-carrier-recovery-analyst-warns_20170828.html delivered the message a letter of intent, or stated intent, was given to order a combined 20 new 22,000 TEU vessels by two different ocean carriers. The carriers signaling the buys were CMA-CMG (09) and MSC (11) both of which belong to different alliances. JOC saw the writing on the wall right off the bat. It can be argued the orders are relatively small in the grand scheme of things. It should also be considered 2015 was a banner vessel ordering year measured by TEU capacity added and 2014 wasn’t far behind. Just those two years alone put over 3 million more TEU’s of capacity in the water. It wasn’t until 2016 and up to today everyone put the brakes on vessel buying.
Much of the existing fleets just aren’t that old. Of course the 22,000 TEU vessels won’t be hitting the water for a few of years and could only be used for the Asia-Europe trade lane. That does follow a sound logic bigger vessels fewer sailings. Although the vessels displaced by the additions of the new vessels have to go somewhere. In short, no matter how I look at it, it’s adding capacity even if the lines sell off to charters.
I don’t believe the intent to order 20 vessels are the potential threat in themselves. I do believe there is the possible threat of other ocean carriers viewing the purchases as the first step in a potential market share grab. If this is the case it very well may trigger the remaining major alliance members to order new capacity to prevent them from being left behind in a market share race. This would effectively scuttle the quite sound plan of not buying vessels, continuing to scrap vessels when possible, utilizing blank sailings to control small capacity issues, and no market share price wars. Could I be dead wrong? You bet. After all it is Robert Dreelan ‘one’ and Tom O’Malley ‘zero’, though people have done dumber things twice.