Commentary Trading Places

By Peter Tirschwell

Having experienced genuine profitability for the first time , carriers have no desire to go back .

Over any number of pre-pandemic years , a word commonly heard at industry conferences , in reference to ocean freight rates , was “ unsustainable .”

It was almost always uttered by ocean carrier executives lamenting chronic pressure on rates and inadequate profits earned by their companies as a consequence .

The point wasn ’ t usually clear , other than to put it out there that the industry faced a problem that would need to be rectified , a reckoning of some kind that would arrive one day . When that day would come no one knew , nor did they know how such a reckoning would take place . Would “ unsustainably ” low rates lead carriers to go bankrupt or withdraw from the market , leaving the US with no one to carry its containerized cargo ? That was hinted at frequently , but no such result ever occurred other than a sole major carrier bankruptcy , Hanjin in 2016 , whose market share was immediately absorbed by other carriers .

It was also suggested that continuous consolidation would occur , and as it did , shippers would be faced with less choice and more pricing power by carriers , which has in fact taken place .

But the idea that shippers should take note and somehow act on these unsustainable rates was lost on them . Shippers have always been rightly wary of paying rates at the low end of the pricing spectrum . But the idea never remotely took hold that they could somehow influence what was an aggregate industry problem , as to avoid an ill-defined undesirable outcome sometime in the future .

And that ’ s how it played out . Shippers individually optimized for cost reduction , and in the absence of inconsistent or unreliable service — only a periodic presence in the market — they went about their business , happy to let overcapacity set the market with few tangible worries about the long-term consequences .

In fact , they had no choice . Shippers work in their own interests , and while some may have agreed that the status quo was unsustainable , they could do nothing about it .

But in ways that could not be anticipated back then , carriers who spoke of the dangers of unsustainably low rates were on to something . They could not foresee , of course , the COVID-19 pandemic and its impact , making a chronically underperforming industry wildly profitable and resetting carriers ’ financial expectations .

That realization and the actions that are flowing from it , is what carriers , without knowing it at the time , were referring to those many years ago .

Low rates were unsustainable , and carriers are now doing everything possible to eke out profits while riding the good fortune of global upheaval .

For shippers , who had optimized their own bottom lines thanks to a chronically weak freight rate market , carriers are now doing the same . The idea of mutual value creation , always an elusive concept in ocean shipping and freight transport generally , was obliterated as shippers ’ prior — if unsustainable — value proposition of good service at a low price flipped on a dime to poor service at a high price .

Yet carriers , who have not forgotten the absence of sympathy extended to them when they were barely making money , see no crime in playing a zero-sum game and extracting maximum revenue for as long as possible , knowing a cliff of overcapacity might be looming , especially if the Suez Canal route becomes safe to navigate .

That has left the market at an unpleasant crossroads . Shipper organizations well beyond logistics teams see no reason why the old status quo shouldn ’ t continue indefinitely and equate low reliability and high price with being ripped off . That makes it hard for the logistics teams to find ways to work productively with carriers .

Carriers are making up for lost time and accept , as the reality of doing business in this market , that actions that benefit them often disadvantage their customers .

Forwarders have their own struggles in dealing with carriers , which have their own grievances against forwarders ; carrier behavior toward forwarders impacts forwarders ’ ability to servicing their own customers .

In that sense , the carriers were right . The low rates seen over many years were unsustainable in that having experienced genuine profitability for the first time , they have no desire to go back to what for shippers were the good old days .

That does not bode well for shippers and carriers working together productively and efficiently . It means the quest for shippers to create value within an ocean container supply chain has gotten more difficult , and perhaps permanently so .

email : peter . tirschwell @ spglobal . com

46 Journal of Commerce | November 4 , 2024 www . joc . com