A New Year and a Word of Caution

By David Bennett
Vice President, Sales & Development, Globe Express Services

Thank goodness the misery of 2008 has come to a close. 2008 will go down in the history books, but who knows at this stage how historians will treat it.

Globally we’ve entered into a very serious recession, with financial markets absorbing losses unlike any my generation has ever experienced. Politically we’ve made history with President-Elect Obama set to take office soon, with an overwhelming majority in the Congress and Senate. Only time will tell what our government will do in order to spend our way out of this current economic cycle.

Carriers in for Wild Ride

One thing is quite certain as we approach the first quarter of 2009 — ocean carriers are set for another wild ride! As reported last month, the key head haul lanes for the carriers have experienced sharp reductions in rate structures that will lead to serious financial consequences for carriers unless something dramatic takes place, and quickly. Every trade publication has addressed the dire state of the industry, and shippers are poised to seize the opportunity to drive rates down to levels we haven’t experienced since the last significant downturn in the markets after the horrific events of 9/11.

Having spent quite a bit of my career on the asset side of the industry, I understand the concerns carriers are taking to their monthly meetings with senior management — that trade volumes and revenues are shrinking as costs continue to mount. These are not fun messages being delivered to the boardrooms around the world.

As we discussed last month, new capacity is still coming on line from the shipyards, and many of the new builds are in the 10,000-12,000 TEU range, which at the current time, can only be utilized to their full operational capacity in the Asia-Europe trades. Last month I also suggested that carriers were considering drastic measures, and it’s obvious at this stage that drastic measures need to be taken. The question on shippers’ minds is just how low can the rates be taken down, and just how quickly can significant savings be shown to senior management during this time of massive cost cutting?

Stay Calm

I’ve never seen the volatility we experienced in the last quarter of 2008. It seems the rates were trying to keep up with the 401K plans that became 201K plans in a matter of weeks. However, I would caution everyone not to get too worked up over this sudden and rapid decline in the state of our respective industries. Consumer spending during this past Christmas was very weak, but history has always repeated itself, which means we will see economic conditions improve at some point.

While ocean freight levels dropped significantly, some other key commodity prices followed. Did you expect us to be looking at oil prices below $60 a barrel in November, less than four months after it hit $147 a barrel? Did you expect that gas prices would drop below $2.00 a gallon in some markets? That’s not a misprint; during a recent sales trip to Kansas, I filled up my rental car for less than $30! (I immediately spent the savings on the Starbucks coffee that I had to give up when gas was $4.00 a gallon.)

The result of these two key indicators has been some deflationary pressures taking place in our economy, which has had some positive impact on our ability to spend on consumer goods. In spite of tight credit markets, money is still cheap to borrow and as in previous recessions — once you hit bottom, you have no place to go except back up. Although many of our fellow Americans are suffering as a result of massive job cuts, I’m very hopeful and confident that conditions are such that we will see a turn-around quickly in 2009, enabling companies to increase their workforce in a short period of time.

Shippers, Don’t Push Too Hard

I wanted to begin the New Year with a word of caution to the shippers. While market conditions have reacted as expected during this very volatile time, we need to be careful as an industry to avoid pushing carriers. Because of their lack of diversity, they can be pushed to the point of no return. Carriers who have more than 50 percent of their revenues tied to the container side of the business cannot absorb the huge losses being forecast, without potentially going out of business.

If we see further consolidation in the industry, the impact is obvious, less tonnage available in the markets and less competition. We all know where that leads, and history has proven that rate increases can take place just as quickly and aggressively as we’ve seen rates fall in recent months.

Carriers’ costs for intermodal services remain high. Their high cost of carrying assets such as 8,000 TEU vessels is tremendous, and terminal operational costs due to high costs of the labor agreements make it difficult for carriers to cut costs without sacrificing services.

We need some normalcy to enter into our markets, and we all need to be cautious as to how we manage these volatile times to prevent our key partners from drowning. Then we can all have a more successful year than what we experienced in 2008!