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September 17 2018

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32 The Journal of Commerce | September 17 2018 Beneath the Surface Gary Ferrulli Connected, yet apart PARTICIPANTS IN THE international shipping arena are looking for improvements. Shippers want better, more reliable service, and better technology. Carriers seek a reasonable rate of return, reliable forecasts from shippers, and an end to no-shows on booked cargo. The two sets of wants and needs are unalterably connected, with few signs that either side will get what they want anytime soon. Several trends dominated the first half of 2018: continuing losses for the carriers, reports heralding chaos in operations, and, more recently, cargo being pushed to later sailings than scheduled, or rolling. In some trades, no-shows hit the 40 to 50 percent range. A reasonable rate of return is still an apparent distant reach for carri- ers, with industry analyst Alphaliner and others blaming the carriers themselves. Continuing overca- pacity was a big factor in first-half results, as were fuel cost increases and carrier inaction to recover them until midyear. Recent actions on both issues are changing those dynamics, but did they come in time for carriers to save 2018 financially? The forecasting and no-show issues with shippers continue. A recent article describes scrap shippers as scrambling to sell and move their goods now that China has limited their ability to ship to their largest market. Those suppliers have turned toward the Indian subcontinent as a new market opportunity. The prob- lem, shippers say, is that there isn't enough capacity in these locations. Carriers respond that there's plenty of space, ships are sailing at less than capacity because 40 to 50 percent of the bookings don't show up. Reports on service reliability, meanwhile, are trending in the wrong direction, with port and weather-related delays primary factors. Lacking a reasonable rate of return, carriers aren't speeding up vessels to make up the time. The potential economic recovery for carriers seems to be right in front of them. They've taken out enough capacity in the major east-west trades to force spot pricing to levels where there can be a reasonable rate of return, but not enough to recover the fuel increases because carriers exempted most, if not all, of the car- go commitments booked in annual contracts. Some shippers with this advantage are suddenly finding their bookings being rolled, and their minimum quantity commitments more strictly enforced, forcing them to look for space. That the carriers have economic recovery right in front of them is much as it was two years ago, when Hanjin Shipping collapsed. Volumes and rates rose at all carriers. If they'd simply continued to manage capacity as they did in the four months fol- lowing Hanjin's exit, most of the rest would have taken care of itself. But the carriers can't seem to quit their bad habits. Historically, when things turn positive for carriers, they reverse course, quickly, as they did in 2017 and right after a spectacular turnaround in 2010, when they went into a six-year tailspin of losing money and watching the industry implode with a major bankruptcy and major mergers and acquisitions. Here they are again, taking the necessary actions to make reason- able rates of return — for now. The question is, will they revert to his- torical actions and return to losing money, or will they turn over a new leaf and manage their businesses in a business-like manner? Shippers wanting better technol- ogy and more reliable services will have to pay a price. Are they willing to do that? Some are; many aren't. Throughout my 46-plus years in the industry, it's been the carriers' decision-making that carried the day, taking them through a path of self-destruction seldom seen in any industry — 75 percent of all carriers that I've known and dealt with no longer exist. We're down to a critical few, and at some point, a reasonable rate of return for shareholders seems inevitable. But we've said that before and nothing has changed. Will it this time? Are we at a tipping point, where it gets better, or will we go through another round of M&A? Will governments allow a handful of carriers to control a large percentage of global containerized trade? One looming question is how long some of these governments will continue to pour money into ship- ping. I have no doubt about China — the country's five-year, $26.5 billion subsidy to Cosco Shipping is ample proof. But what about the ongoing losses by the Taiwanese and the Koreans. There seems to be no end in sight to the largesse of those govern- ments to keep their flags flying. How does that play for the true commercial, for-profit carriers? How does their planning and strategy account for competing with carriers that may or may not have a profit motive and get huge sums of money from their governments? How does it play for shippers? It would appear they want government subsidies to carriers to continue — it keeps rates low, after all. But is it also a big contributor to the poor to mediocre services and lack of modern technology? The connectivity seems obvious, but the landscape doesn't seem to change. Shippers clamor for improvements, and the carriers pro- vide the services they're paid for. It could change, but the decision-mak- ing is in the carriers' hands. JOC Gary Ferrulli is chief executive of Global Logistics & Transport Consulting. Contact him at gferrulli@ Here they are again, taking the necessary actions to make reasonable rates of return — for now.

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