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July 20 2020

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4 The Journal of Commerce | July 202020 www.joc.com Mark Szakonyi THE CAPACITY DISCIPLINE that has allowed container lines to keep spot rates elevated on major trades despite falling volumes, raising the chances that the industry will end the year in the black, is beginning to draw a back- lash from shippers. Given that they "have done well in a pandemic," Drewry Shipping Consultants wondered aloud in a July 6 report whether carriers are profiteering from the disruption caused by the COVID-19 pandemic. In the report, titled "When big profits look bad," the consultancy also asked what can be done to smooth tensions between carriers and shippers. "The current situation — higher carrier profits, but no service improvements — should be a reason for concern for competition author - ities," Olaf Merk, ports and shipping expert of the Organization for Economic Co-operation and Devel- opment's International Trade Forum (ITF), said in an interview with The Journal of Commerce. In the first three months of 2020, container carriers were generally about as profitable as they were during the first quarter of 2019, notching an operating profit of roughly $1.4 billion and a margin of 3.2 percent, when accounting for earnings before interest, taxes, depreciation, and amortization, according to Drewry. That single-digit profit margin pales in comparison to the value of global trade. The total annual value of manufactured goods traded internationally alone is roughly $13 trillion, said Lars Jensen of Sea- Intelligence Consulting. In a LinkedIn post, Jensen brushed off suggestions of carriers deliberately profiting from the pandemic, pointing to analysis that shows ocean freight costs account for a value of about 1.3 cents for each dollar of goods transported. "The rate increase indicated by the CCFI [China Containerized Freight Index] index thus far in 2020 means that each dollar of goods have seen a freight rate increase of $0.0009 — is that tantamount to profiteering?" Jensen asked. According to Jensen, if carriers can keep up the capacity discipline they showed in the first half, they'll be on track to end the year with $9 billion in profit. If they can't, they'll lose as much as $7 billion, he said, noting there's no guarantee that carriers won't chase business by undercutting rates as volume rebounds. "Hence it's far from a certainty that carriers will end the year on a positive note," Jensen said. There's plenty of ammunition to feed the grumbling among some shippers and forwarders and raise the eyebrows of industry watchers. Trans-Pacific carriers have made three general rate increase (GRI) pushes in a month, and all three have been successful in driving spot rates higher. Eastbound spot rates from Asia to the US West and East coasts in early July were up 69 percent and 24 percent, respec - tively, from a year ago, according to the Shanghai Containerized Freight Index (SCFI). The cost to ship a TEU from China to North Europe was roughly a third higher than in July 2019. Carriers have been swift to remove capacity as global volumes fell 8.7 percent in the first five months from the same period a year ago, according to data from the ITF. Though adjusting capacity to lower demand was essential for their busi- ness survival, blank sailings aren't improving service. Even if shippers receive a notification two weeks before the cancelled sailing, they still have to adjust with their suppliers and inland transportation providers. Unsurprisingly, this has led to flare-ups between carriers and their customers. In the trans-Pacific, for example, cargo owners and non- vessel-operating common carriers (NVOs) aren't technically required to pay peak-season surcharges (PSS) if their contracted cargo is exempt per service agreement. But when carriers have leverage, thanks to tightening capacity, shippers, and particularly forwarders, complain they can either accept the surcharges or find that their cargo has missed the scheduled sailing. "I could have said 'no' to the PSS, but then I wouldn't have gotten any lifts," said David Bennett, president of the Americas at the NVO Globe Express Services. US retailers and other cargo owners are telling The Journal of Commerce say they have a shaky sense of how much volume they'll need beyond a four- to six-week horizon. That's not helping carriers adjust capacity to demand. Pockets of tight capacity from late spring into summer were caused by unexpected surges of Asian imports, carriers say. And uncertainty about how much pandemic-impacted US consum - ers will spend as COVID-19 continues to batter much of the country — espe- cially Arizona, California, Florida, and Texas — is only making them more hesitant to add capacity even as vol- umes pick up. Additionally, carriers are asset-heavy and capital intensive, forc- ing them to make decisions that benefit their networks, even if that means some customers get left in the lurch. Carriers' reluctance to add capacity is understandable, particularly given that lines were burned badly after failing to remove supply following the plunge in volumes triggered by the 2008–09 financial crisis. And while a profitable year may be within the reach of carriers, it would still be just one year. Between 1995 and 2016, the industry's return on capital was lower than its cost of capital, wiping away $110 billion in value, according to a 2018 report by McKinsey & Co. JOC email: mark.szakonyi@ihsmarkit.com twitter: @markszakonyi Profits during a pandemic The Journal of Commerce (USPS 279 – 060), ISSN 1530-7557, July 20, 2020, Volume 21, Issue No. 15. The Journal of Commerce is published bi-weekly except the last week in December (printed 25 times per year) by JOC Group Inc., 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Subscription price: $595 a year. Periodicals postage paid at New York, N.Y., and additional mailing offices. © All rights reserved. No portion of this publication may be copied or reprinted without written permission from the publisher. POSTMASTER: Please send address changes to The Journal of Commerce, Subscription Services Department, 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Letter from the Editor "I could have said 'no' to the PSS, but then I wouldn't have gotten any lis."

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