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Sept.5, 2016

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BENEATH THE SURFACE 42 THE JOURNAL OF COMMERCE Gary Ferrulli SEPTEMBER 5.2016 THE HEADLINE, IN part, read, "Wave goodbye," and the ensuing article from Drewry Maritime Research described how the container car - rier industry will lose $5 billion to $10 billion in 2016; carriers have lost $20 billion in top-line revenue so far this year and by year's end this could reach $50 billion. With sec- ond-quarter earnings reports from several carriers all pretty much alike — lower revenue on slightly lower costs and significantly lower rates — it's deja vu to 2009, when the industry lost a reported $22 billion. The differences today are increased volumes and decreased costs, including fuel, meaning, in reality, it's worse now than in 2009. This, of course, has many benefi- cial cargo owners concerned about the health of the industry and the carriers they rely on to move their freight. While in Houston in early August, I called on six relatively large BCOs, with at least three won- dering how many carriers would eventually exist. And, while many BCOs are concerned about the lack of choice today because of the emer- gence of several mega-alliances, it's only going to get worse. If you think this is an isolated instance, you're wrong. When I entered the industry in 1972, the international waters were filled with nationally supported shipping companies: nine in the U.S., six Japanese, seven South American, and one each from Korea, Taiwan, Australia-New Zealand, Israel and the Soviet Union. There were at least six from Europe, and I'm relatively certain I've missed some. That's not counting the handful of true commercial, nongovern- ment-supported companies such as Maersk Line, Sea-Land Service, Barber Blue Sea, Seatrain, Knutsen Line, OOCL and Johnson Scan Star. But look at these numbers: 40 relatively viable ocean carriers, vir- tually none of them global and few with joint services. Sea-Land was as close to being global as anyone, and it was far from it at the time. Nearly three-quarters of those companies have disappeared in the four-plus decades since. Some new companies joined the mix, of course: Mediterranean Shipping Co., CMA CGM, Evergreen, China Cosco Ship- ping, among them. Even Hanjin and Hyundai, both of which are under severe financial pressure, are rela- tive newcomers. When they started, MSC, CMA CGM, OOCL and oth- ers could charter 10- to 15-year-old ships, lease some containers, hire a few agents and they were in business. The differences between today's environment and yesteryears involve the tremendous investment it takes to become a viable player on the global stage. The global market has quadrupled since 1986, and it helped float all boats. But severe downturns in the global economies forced gov- ernments to withdraw subsidies, including those for ocean carriers. For a good portion of the time these now-departed carriers were around, legalized price-fixing and antitrust immunity also were in vogue. Yet they still came and went out of business. If you can't sur- vive when your governments are subsidizing you and have antitrust immunity from price-fixing, well, something is very wrong. Many would say subsidies serve as a deterrent to being a strong and smart business entity, with little incentive to make money. Some sub- sidies exist today directly, as in the U.S. Maritime Security Program, or indirectly with tax incentives or other state incentives in the Middle East, Europe and Asia. But the trend continues: Carriers come into the market, then go out of business. Returns are poor, and flashes of prosperity are rare. This year will be the sixth consecutive year the industry will lose money. The issue of the day is supply-demand ratios and the extremes of low rates. When I saw the rate to move a 40-foot container from China to the U.S. West Coast fall below $600 a couple of months ago, I thought it was a high U.S. export rate and not a super-low import rate. When I see $600-per-FEU rates from Chicago to China, less than $200 per FEU from the U.S. East Coast to Europe, $750 from Arizona to the Middle East, I know things are out of hand. In retrospect, during my 44 years in this crazy industry, maybe there were never any really good days. At various times over that span, I've seen high conference rates lead to cash rebates, carriers offer- ing hundreds of days of free time and free positioning of equipment as though there was no cost involved. Today, it's low prices, a multi- tude of exemptions to charges in service contracts and absurd spot market rates available to almost anyone through Chinese non-vessel- operating common carriers that are serving as the profit robbers. Will t he env ironment ever change? I thought it had in 2010 as carriers smartly controlled their capacity to first stabilize and then raise rates. They haven't repeated that model since and that's why they're on their way to a sixth straight year of losses. There are some bright spots — or maybe were — with Maersk's mete- oric rise to more than $1 billion in profit in three out of four years while most of the industry foundered. OOCL has had relative success as a smaller entity. CMA CGM had some reasonably good years in the same time frame. And MSC, which is a bit of a mystery because it doesn't publish its results, is the second-largest car- rier in terms of global capacity and is involved in a seemingly strong alli- ance — the 2M — with Maersk. Beyond that, it's lots of painful red results. JOC Gary Ferrulli is president-North America for Unicon Logistics. Contact him at ALL PAIN, NO GAIN

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