Ocean Shipping Losses Could Top $20 Billion

This story appears in the Nov. 30 print edition of Transport Topics.

ANAHEIM, Calif. — Whenever truckers think times are tough in their industry, they might want to consider ocean shipping, where the estimated losses this year could top $20 billion, shipping officials here said.

Ronald Widdows, group president of NOL Group, one of the world’s largest container carriers, provided that estimate. He also urged attendees at the Intermodal Expo/TransComp here to get ready either for sizable rate increases in 2010 or for multiple bankruptcies and the dislocation they could bring.

Last month, the Transpacific Stabilization Agreement, which comprises carriers that move cargo between Asia and the United States, said it would need rate increases of up to $1,000 a load — plus a peak-season surcharge — to counter their losses.

Drewry Shipping Consultants Ltd., based in London, made the $20 billion annual loss estimate.

The carrier group made the announcement far in advance of the 2010 contract negotiating season, which begins early next year.

“Rates are going to increase because they have to,” Widdows said. “If they do not improve soon, there will be a bunch of carriers who do not survive. As we speak, capacity is being removed as quickly as possible. If the situation continues, there will be bankruptcies.

“Desperation is not too strong a word,” Widdows said. “Rates have to go up to some degree, and price pressure will continue for a long time.”

He didn’t elaborate, however.

“To what degree is the question,” said Martin Bernstein, director of transportation excellence for JCPenney Co.

“We just can’t pass along [rate increases] to customers. We can’t afford to do that with sale prices that are 30[%] to 40% off,” he said. “We are still in an environment where the consumer is buying out of need and not out of want.”

Bernstein also noted that the retailer’s customers are looking for the same attributes — quality products at competitive prices with good service.

The Transpacific group, whose members include NOL and of which Widdows is chairman, said when the rate-increase plan was announced that “carriers understand they need a different approach and need to work with shippers more closely to help them understand the challenges facing the industry and the implications for global trade.”

Widdows highlighted a derivative problem for ocean carriers, a looming financing dilemma that already has surfaced in the bulk shipping sector with the losses of German KG [Kommanditgesellschaft — limited partner business entity] shipping funds, and a plea by its financial backers for government aid.

Widdows added, “This is not, ‘Woe is me, look at what the customers did to us.’ This is largely of our own doing.”

He predicted carriers will still lose money as an industry next year, but not as much as this year.

Bernstein observed that customers face a problem of their own as carriers move to cut costs by reducing capacity and changing service schedules with as few as 30 days’ notice.

“Changes to sailing schedules are a problem,” Bernstein said. “We’ve had to lower inventory to become leaner and meaner. We are in a Catch 22.”

The result, Bernstein said, is that product flows are disrupted and order fulfillment four to six months earlier based on a contract with different schedules has to be altered to ensure that goods are in stores when expected.

JCPenney is evaluating other sourcing options to add flexibility to its supply chain, he added.

Bernstein said he ruled out faster air freight shipping as an alternative because it was too expensive.

Richard Lidinsky, the new chairman of the Federal Maritime Commission, said his agency is prepared to assist carriers in any way possible. He also said the agency would be studying the effects of the decision by the European Union to end antitrust immunity for ocean carriers.

The EU immunity that allowed carriers to set rates as a group was ended last year.

Lidinsky gave no timetable for completing the FMC’s study.