Vacation Got the Best of Me - Maersk Looks into A Dim Future for Containers

Ok, just for my regular readers, I am back.  Took a bit of a vacation and toured around Europe for a while.  Sorry for the lack of posts and I will begin getting back to my normal cadence.  Now on to business and the first one will be the state of ocean freight.

A recent article in the Wall Street Journal cited Maersk warning of subdued demand in ocean container traffic.  And, of course, I have been warning and talking about this and about the lousy economics of this industry since I published "The Sick State of Ocean Freight" back in March. An industry which is far over capacity is now launching new Mega ships and increasing the overall fleet size - not a formula for success.. unless.....

Maersk says they are overcoming the excess capacity by increasing rates.  Huh?  This is one of the few industries which, dare I say, colludes, and everyone knows it.  In fact, it is quasi legal so when you are negotiating don't necessarily expect the laws of economics to work.  We have all learned when supply exceeds demand prices go down.  According to the Wall Street Journal:

"Excess tonnage, estimated at 10% above current demand, has kept rates under pressure and all but seven of the biggest 30 players lost money in 2012. Cumulative losses over the past four years have run to about $7 billion."

It goes on to say that Maersk has said:

"Still, Maersk posted a better-than-expected first-quarter net profit as it pushed through higher prices to customers. It expects container transport demand to remain subdued this year amid challenging conditions.

Essentially Maersk is saying the customer will pay for empty ships through higher prices.  I am sure if they were under capacity and over demand they would say you will pay higher prices to "reserve a spot" on an already oversold ship.  Apparently the story goes not matter what is happening in the market place you will pay higher prices.

If you remember my multiple discussions on "Anchoring" you will see this activity in action.  They are, through these public statements trying to anchor the buyers thoughts.  Essentially start all conversations with the premise that rates are going up in some fashion and now it is just a question of how much.

Don't fall for it.  As i have said over and over again use the laws of economics, understand your lanes and understand the economics of your lanes and then use that as the starting position.  You will have a much better outcome.

The Sick State of Ocean Freight

I do not spend a lot of time on ocean freight and I probably should spend more.  Suffice it to say I know it is in a dramatic over capacity situation and has been for a few years.

Recently, I read an article over at Supply Chain Brain titled: Economics 101: Did Ocean Carriers Miss The Lesson and it really brought home just how "sick" this industry is right now.  The critical fact is capacity is growing by about 7% and demand may grow by 1% if we are lucky.  The ships are already underutilized, new "mega ships" (like the Maersk 18,000TEU "Triple - E" ship) are coming on line and demand does not seem to be growing.  Add that they have parked what they can and have "slow steamed" as much as they can (short of just drifting in the current) and I think you see this is the makings for a bad industry.

The good news is if you are in procurement for ocean freight you should be delivering great results to your company bottom line.  Oh, and those GRI's which seem to pop up every now and then - you can ignore them thank you.  They cannot possibly stick.

If you have a minute.. watch below as the behemoth is being built: