Box line crisis performance risks looking to customers like profiteering

7/12/2020

While container lines have done relatively well financially during the COVID-19 pandemic, cargo owners have faced inflated transport costs and lower service quality, with many shippers reporting cargo roll-overs and carriers prioritising higher-paying spot cargo, according to container shipping consultancy and analyst Drewry.

The firm said that container shipping lines are one of the few sectors that can be said to be having a good pandemic, but their positive financial performance risks them appearing to be profiteering from the crisis and may lead to carrier-shipper animosity. Drewry indicated that it did not believe lines have been profiteering but that they needed to do more to develop a better shipper-carrier dialogue in order to prevent possible animosity from building.

It noted that, “perversely, despite a sudden fall off in demand for their services, lines look set this year to make more money than they have in a long time as their crisis-management tactics – essentially blanking voyages – has paid off handsomely. In our latest Container Forecaster report, published at the end of June, Drewry estimates that the industry secured an operating profit (EBIT) of around $1.4 billion and margin of 3.2% in 1Q20, pretty much on par with the same quarter of last year.” 

It said that while the first quarter was not a full test of the industry’s COVID-19 coping mechanism as most countries did not enter lockdown until quite late in the period, “all signs point to operating carriers having not only survived the market shock, but even benefitting from it, with spot market rates soaring and a number of previously guarded companies now upgrading quarterly and full-year guidance”. 

But the same cannot be said of other stakeholders, Drewry said, highlighting that “cargo owners have had to contend with greatly inflated transportation costs, but lower service quality. Many shippers have been experiencing cargo roll-overs, including some contract BCOs that have told Drewry carriers are prioritising much higher-paying spot cargoes”.

Rolled cargo

It said that despite significantly reduced bunker costs in the second quarter of 2020 (2Q20), “few shippers saw anything near the full benefit of these reductions as carriers used their market leverage to hold onto bunker surcharges with the threat of rolled cargo”, highlighting that Drewry is involved in an industry initiative to develop a fair, neutral bunker adjustment factor indexing mechanism, alongside the European Shippers’ Council (ESC) and new partner CLECAT, the European forwarders’ association.

“From a public relations perspective, the optics of making big profits during a global crisis are not great,” Drewry noted. “The price will be more animosity and accusations of profiteering.”

Drewry said it was “inclined to give carriers the benefit of the doubt for now”, noting that the highly unpredictable outlook for demand meant that instances of capacity over-suppression in some trades “was always likely”. It said lines are now starting to return capacity to the worst-affected trades such as the eastbound transpacific to accommodate higher-than-expected demand with some previously blanked sailings being put back on to schedules.

“That makes previous capacity over-reductions look more like understandable misjudgements rather than anything more malicious,” Drewry said. “However, we might change our view if capacity continues to be kept significantly below market needs.”

Carrier-customer relationship

But it said the situation raises interesting questions about the purpose of carriers and the expectations of their customers, adding: “Carriers may be one of the biggest facilitators of world trade, but they are also for-profit commercial entities with shareholders to answer to. So long as they can fulfil their primary role of keeping the global supply-chain in motion, why shouldn’t carriers do everything in their power to maximise profits? 

“It is not as if they have a great track-record for making money – shippers have mostly had the upper hand in recent years – and if no profits are being made, investment in the future capacity needed to propel trade around the world will be curtailed.”

Drewry acknowledged that cargo owners also “have to look out for their own interests, so it is unrealistic to expect both parties to sit down with the peace pipe together”. However, it said the two sides would benefit from a good relationship and cooperation, and “the battles of the past have only resulted in a sub-optimal supply-chain, pockmarked by volatile swings in freight rates and draconian capacity management”. 

The container shipping consultancy added: “One can but hope that a better shipper-carrier dialogue evolves out of this crisis that might produce more of a happy medium. It will take some effort from both sides.

“Shipping lines could do a better job in terms of giving notice and rationale when making capacity changes, while closer consultation with customers about the likely timing and scale of any future rebound can help to avoid potential bottlenecks. Cargo owners should be aware that carriers need to maintain a minimum level of revenues in all conditions, or else they will be forced to withdraw services.”

Freight rates set to soften

Highlighting its expectations on rates for the second half of 2020 (2H20), Drewry concluded: “Drewry expects freight rates to soften in 2H20 as carriers will cautiously reintroduce capacity to meet any demand recovery, but not at the expense of a large collapse in rates to uneconomic levels.”

In an article last week, Lloyd’s Loading List reported claims from shippers and forwarders that not all carriers are passing on fuel savings as agreed, with European carriers especially highlighted, while certain customers are said to be receiving preferential treatment.

Lloyd’s Loading List also reported last week that CLECAT had also entered into a collaborative agreement with container shipping consultancy Drewry to raise awareness among its freight forwarder membership of Drewry’s Forwarder Benchmarking Club, which allows members can compare their ocean freight carrier buy rates against those of their peers.