State of Ocean Cargo: Cutting through the Fog
Logistics Management, Patrick Burnson, Executive Editor ? June 6, 2016
In the wildly unstable ocean cargo carrier arena, three major consortia are fighting for market share, with some players simply hanging on for survival. Meanwhile, shippers may expect deployment shifts as a consequence of the Panama Canal expansion. However, the historic event takes place at a time when shippers are trying to make sense of quickly shifting ocean carrier alliances and partnerships?with the viability of some players even brought into question. The mad ocean carrier race toward consolidation began earlier this year with the announcement of the 2M Alliance, comprising Denmark?s Maersk Line, the shipping unit of A.P. Moller-Maersk A/S, and Geneva-based MSC. Together, they dominate the Asia-EU trade lanes with almost 35% of market share.
All this movement left a scattering of six carriers out on their own. And with their ability to survive?much less thrive?in this new environment brought into question, a final fling into yet another alliance was made. This flurry of convenient marriages was widely predicted by a number of industry analysts. AlixPartners concluded that the long-beleaguered financial state of the maritime container shipping industry would likely worsen in 2016, and that only consolidation would cure the malaise. ?Our outlook found that growing vessel supply, led by the ongoing introduction of giant megaships coupled with demand that shriveled in the second half of last year, left the industry with massive overcapacity, falling profitability, and precarious cash-flow levels?.
A recent study issued by the firm asserts that companies with merger and acquisitions on their minds need to be proactive if they hope to reap the kind of rewards that winners in consolidated industries enjoy?or to prevent becoming acquisition targets themselves. And, along the way, the study points to the successful consolidation of the US airline industry as a possible template for revival. ?Operational overhauls will also be necessary in this industry, which as a whole remains deeply troubled,? adds Finley. ?In addition, these uncertain market conditions are casting a long shadow over the annual rate negotiation cycle kicking off between major importers and their carrier bases.?
According to the AlixPartners report, due to the continued introduction of mega vessels?capable of carrying more than 18,000 TEUs?industry capacity globally is expected to jump by 4.5% in 2016 and another 5.6% in 2017, while demand is expected to increase just 1% to 3% this year. Ironically, says the study, the resulting overcapacity, and corresponding negative effect on profits, is in part the result of the industry?s drive in recent years to correct its chronic supply-and-demand imbalance by building these more-efficient, but mammoth ships.
Moreover, this new capacity in major trade lanes is likely to continue to distort the supply-and-demand balance globally, as the slate of vessel deliveries scheduled for 2016 and 2017 remains robust. Per the demand side, last year started off with promise, as carriers generally reported improved profits through the first half of 2015 on the backs of stronger freight rates and declining fuel costs. However, the good times were short-lived, as traditional peak demand failed to materialize in the third quarter, leading to collapsing freight rates. Industry revenue in the critical, pre-holiday third quarter has declined in each of the last three years, to $39.6 billion in 2015 versus $45.9 billion in 2014 and $46.5 billion in 2013. The drop-off last year represents a 16% decline.
As a result of these types of factors, the study finds that nearly all of the key financial indicators for the ocean carrier market have declined. It finds that industry profits, as measured by EBITDA, fell 7% in the latest 12-month period, including a whopping 35% decline in the all-important third quarter. Perhaps of even more-immediate concern, it finds that cash from operations declined by almost twice as fast as EBITDA in the 12-month period (by 12%), indicating that carriers face working-capital challenges, often a precursor to bankruptcy.
Given the already challenged state of the industry, and the turn for the worse of several key industry barometers, AlixPartners analysts forecast continued poor financial results for at least the remainder of 2016. However, it also provides a possible consolidation template for industry companies not willing to live with what the study calls a ?new normal? of anemic results. Recent multibillion-dollar mergers such as Global Shippers? Forum (GSF). The GSF is calling for the establishment of a ?Maritime Industries Supply Chain Forum? at an international level to address the full range of challenges facing the sector.
?Shippers have generally supported cooperation through consortia and vessel-sharing agreements as the appropriate means of rationalizing costs, provided that they themselves receive a share of the benefits in terms of enhanced quality and a wider range of services made available to customers,? says Chris Welsh, secretary general of the Global Shippers? Forum. Several years since the introduction of mega vessels, Welsh contends that shippers continue to experience poor quality services and disruption to their supply chains through the bunching of vessels, ?void sailings? and other delays.
And one year since the publication of the Forum?s report on ?The Impact of Mega Ships,? there has been no serious response by the shipping industry to the issues it identified?namely the wider external costs imposed by mega ships and alliances of others in the supply chain, including shippers, port, terminal operators and governments. ?The onus is on the industry to demonstrate that the bigger ships and alliance business model is the best response to the economic and financial challenges faced by carriers, but also adds value to customers,? says Welsh. ?We believe cooperation between the main international stakeholders in a new maritime industries forum would enable the wider maritime supply chain to develop solutions to the problems presented by bigger ships and alliances in a constructive and consensual manner.?
Welsh and other shippers conclude that the perceived wisdom is that bigger ships and alliances are good for competition because of the benefits they are said to confer. If the reality is that they add costs because of the negative externalities they impose on others, then that perception may change. ?If they restrict choice through reduced service competition, then other regulatory or competition policy approaches may be necessary to deal with the competition issues raised by mega vessels and alliances,? adds Welsh.
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The TPP Agreement: An Opportunity for the United States
Business roundtable ? August 5, 2016
? The Trans-Pacific Partnership (TPP) agreement will strengthen trade and investment relationships between the United States and 11 other countries in the Asia-Pacific region.
? The TPP will help expand existing trade between the United States and six current free trade agreement (FTA) partners, which will support US economic growth and jobs.
? The TPP will also open new markets for the United States with five Asia-Pacific countries that are not current US FTA partners, benefiting a variety of US businesses, farmers, and workers.
? In addition, the TPP will help increase investment ties between the United States and all TPP countries, supporting economic growth and jobs in the United States.
The United States and 11 other countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) have completed the Trans-Pacific Partnership (TPP) agreement, which will support economic growth and jobs by removing trade barriers for goods and services, improving intellectual property protection, and creating new 21st century trade rules. The TPP will help increase US trade and investment ties with these countries, which have a combined population of 490 million people and account for about 14 percent of global trade. For additional information on the TPP negotiations:
The United States has important trade and investment ties with TPP countries. In 2014, US trade ? exports and imports of goods and services ? with TPP countries supported an estimated 15.6 million jobs. The United States exported $726 billion worth of goods to TPP countries in 2014. The TPP will help build on these trade and investment relationships and support the US jobs that depend on them.
The TPP agreement will help support this trade and ensure that it is subject to 21st century trade rules. Specifically, the TPP provides an opportunity to grow these goods and services exports still further and to address a range of important barriers that continue to impede exports to these countries. The TPP agreement also will help US manufacturers buy the inputs they need to produce competitive products. Currently, roughly 64 percent of all US imports from TPP countries consist of raw materials, components, machinery, and other goods used to grow crops or make products in the United States. For example, Canada and Mexico play key roles in global supply chains. A significant share of the value of US imports from Canada and Mexico (74 percent and 59 percent, respectively) is used as intermediate inputs for making finished US products. The TPP will help to support these global supply chains and facilitate further trade with current bilateral FTA partners.
The TPP will also provide the United States with an opportunity to open new markets for its goods and services in countries that are not current FTA partners. Of the 11 TPP countries, five (Brunei, Japan, Malaysia, New Zealand, and Vietnam) are not current US FTA partners. With a combined population of 253 million people and a combined economy of $5.3 trillion, these ?new FTA? TPP countries have the potential to be vibrant new markets for US exports. The United States has good trade ties with several of these countries. The United States exported $90.4 billion in goods and $51.8 billion in services in 2014 to the ?new FTA? TPP countries. However, American producers currently face steep tariffs and other barriers to certain exports to these countries. The TPP provides an avenue for removing these barriers and increasing US exports.
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