Shipping now a high-seas scrimmage

By Marla Dickerson
Los Angeles Times

The port of Oakland, Calif., began unloading ships again last month under presidential order ending a lockout of workers. But the shipping industry's biggest woe may be its own cutthroat competition, not port contracts. Bloomberg News Service library photo • Oct. 10, 2002

The global shipping industry is in financial straits, thanks in part to a glut of new ships ordered during the economic boom. Freight rates have tumbled. Carriers are bleeding red ink. Yet shipping lines continue to add gigantic vessels to their fleets as part of an arms race to grab market share.

In a year when cargo on the Asia-North America trade lanes has hit record levels, major trans-Pacific carriers are projected to lose a combined $2 billion in 2002.

Losses on other global trade routes are mounting as well.

"The state of the industry can be summed up in one word: 'dismal,' " said John Gurrad, vice president of business planning for Mitsui O.S.K. Lines, a Japanese carrier whose net income plunged 60 percent in the first half of its fiscal year ending in September.

In theory, shipping lines should be riding high on a wave of globalization. Ocean carriers deliver a service vital to the United States and world economies. President Bush stepped in to reopen West Coast ports last month, ending a 10-day management lockout.

What's more, steamship companies enjoy an exemption from U.S. antitrust law, which allows them to discuss pricing and set rate targets on their U.S. routes.

But the confederacy of ocean carriers has proved even leakier than the OPEC cartel.

Instead of standing firm on rate hikes and holding the line on new ships, they tend to undercut each other when the going gets tough, industry experts say. Burdened with too much debt and too many players chasing too few shipping containers in a sluggish global economy, the industry is facing troubles that extend well beyond the squabble at the West Coast ports.

"It's not a healthy industry and it hasn't been for some time," said London-based analyst John Fossey of Drewry Shipping Consultants. "We're looking at a relatively low freight rate environment for at least the next couple of years."

Ocean shipping is a cyclical business that rises and falls with the global economy. Still, many of the industry's troubles are of its own making.

For starters, the world simply has too many carriers. Literally hundreds of small fries serve niche markets around the globe, with dozens of bigger players duking it out on the major trade routes linking the United States, Asia and Europe. Barriers to entry are low. Competition is fierce. Companies that exit the business rarely take their vessels with them.

"If a steamship line goes belly-up, those ships don't sink," said port consultant Peter Vandermat, vice president of Oakland, Calif.-based JWD Group. "A competitor picks them up for 25 cents on the dollar, paints a different symbol on the stack and on we go. There is just as much capacity as before."

And it's growing. International trade accelerated in the late '90s, particularly on Pacific routes linking Asia and the United States. Among the factors driving the trend: a booming U.S. economy, China's rise as a manufacturing powerhouse and its neighbors' eagerness to export their way out of the Asian economic crisis.

Giddy over the surging cargo volume, and enticed by bargain prices from shipbuilders, ocean carriers rushed to order new vessels. Many of those orders were for leviathan "post-Panamax" ships, so named because they're too wide to fit through the Panama Canal. The largest are capable of carrying upwards of 7,000 20-foot shipping containers (known as "twenty-foot equivalent units" or TEUs).

Bigger ships have helped add to the industry's capacity, which has been growing faster than cargo volume for several years. The disparity only got worse during last year's economic downturn. London-based trade publication Containersation International projects that in 2002 alone, the capacity of the world fleet will grow by nearly 14 percent to 6.1 million TEUs, while demand has grown only 4 percent.

"There is a huge supply and demand imbalance," said managing editor Matthew Beddow.

Stormy market conditions sank South Korean carrier Cho Yang Shipping Co. last year, and industry watchers are predicting more casualties. But consolidation hasn't come as quickly as many had expected.

The United States lost two of its major flagship carriers in the late 1990s. One was Oakland-based APL Ltd., which merged with Singapore-based Neptune Orient Lines. The other was Sea-Land Service Inc. of Charlotte, N.C., which was acquired by Maersk Line, a division of the Danish conglomerate A.P. Moller.

But other countries haven't been so willing to surrender their flags.

Some foreign governments nurture their shipping lines as a matter of pride, economic development or national security. China Shipping Container Line, for example, the world's 17th-largest carrier, is a wholly state-owned enterprise. China Ocean Shipping Co. or Cosco, which ranks seventh, has subsidiaries controlled by the Chinese government. Other Asian nations are closely allied with their home-grown carriers as well.

Governments don't have the same profit motive as private enterprises. Observers say China's shipping industry exists largely to support a booming export trade, the key to that nation's breathtaking growth and development.

The trans-Pacific shipping routes have become the world's busiest on the strength of Chinese exports to the United States — more than $100 billion worth last year alone.

But steamship competitors complain that China is more concerned about keeping its factories humming than about turning a profit on its shipping enterprises.

"We're in the business to maximize our bottom line," groused a U.S.-based industry veteran. "It's not clear that the Chinese lines are in business to do the same thing. It's in their interest to keep rates low to support their export policy."

Carrier "discussion agreements" established to smooth ruffled feathers and hammer out price strategy have met with only limited success.

The United States allowed steamship lines to enter into price-fixing agreements beginning in 1916 to eliminate "destructive" competition and encourage rate stability. Critics have lambasted the antitrust exemption and have long lobbied to have it revoked. Congress has weakened the shipping industry's protection somewhat in recent years. Carrier groups are allowed to set pricing "guidelines" for their members. However, individual steamship lines are free to negotiate their own rates with customers in private.

Even with its antitrust exemption, the shipping industry has had difficulty coordinating its actions. Carriers routinely break ranks and slash rates to preserve market share at the slightest hint of slowdown.

That behavior cost trans-Pacific carriers a bundle this year. Spooked by last year's U.S. recession and the events of Sept. 11, many steamship lines cut bargain deals with their biggest customers in early 2002, only to watch cargo volume surge by early summer because of strong spending by U.S. consumers. The latest figures from Containersation International show the average rate for commodities traveling from Asia to the United States slipped to $1,463 in the second quarter, the lowest level seen since the 1997-98 Asian crisis.

Carriers can at least take solace in winning long-awaited improvements in technology at the West Coast ports that should reduce their operating costs and boost productivity in coming years.