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TRADING PLACES 70 THE JOURNAL OF COMMERCE Peter Tirschwell SEPTEMBER 5.2016 ANY SHIPPER WHO depends on con- ta iner t ra nspor tat ion must be looking w it h g reat concern at developments in this extraordinary year of 2016, and what they could mean for the future. The parallel developments of rate erosion and industry restruc- turing, both occurring at a historic scale, point to the increasingly plau- sible conclusion that the table is being set for a transformation that ultimately will come down to this: Rate levels currently hovering at his- toric lows are poised for a long-term, non-cyclical upward adjustment. I'm increasingly hearing this in conversa- tions with industry contacts. "Five years from now, at the lat- est, rates will be a lot higher than they are now. To me, we're at the absolute low point right now," said James I. Newsome III, CEO of the South Carolina Ports Authority and former U.S. president of Nedlloyd and Hapag-Lloyd. Why today may mark a turning point is the nature of the industry's response to a crippling erosion in freight rates. Following the last industry trough in 2009, carriers ferociously attacked costs, building mega-ships, reducing company head- count, withdrawing from chassis operations, and pressuring suppli- ers. But outside of a few minor deals, it didn't consolidate, and thus left unaddressed the fundamental prob- lem the carriers face on the revenue side: sustained exposure to price dis- counting on an uncontrollable scale. Maersk Line has reduced costs 38 percent since 2012 (to $1,911 per 40-foot-equivalent-unit container), "a remarkable cost journey over the last four years," Group CEO Soren Skou said. In 2009, the carriers collectively lost $19 billion, but this year because of success in cost cutting across the industry, they collectively may only lose $5 billion, according to Drewry. But as this year is showing, cost cutting — further aided by much lower oil prices — can achieve only so much. The sand castle built from saved money was no match for the wave of rate cutting that has swept the industry this year. M a e r s k 's s e c o n d - q u a r t e r earnings and those of other car- riers, including Hapag-Lloyd, OOCL, United Arab Shipping Co., and Hanjin, lay bare the carnage. Maersk's earnings plunged 90 per - cent versus the second quarter of 2015, with its revenue in the quarter 19 percent lower and average freight rates down 24 percent. OOCL, one of the best managed carriers, reported its first January-June loss since 2009, with average rates plummet- ing 21 percent. Drewry estimates that first-half revenue from a group of listed carriers was down 18 percent on average, $50 billion in revenue has been wiped out over the past two years and 2016 total revenue is headed for levels not seen since 2009. But the consolidation now occur- ring at a historic pace represents a fundamentally different response and one that could reset the rate structure. The merger and acquisi - tion activity that is bringing together CMA CGM and APL, Cosco and China Shipping, and Hapag-Lloyd and UASC isn't over yet. Newsome says he believes the industry will consolidate from 20 carriers down to 10, and he's not alone in that view. "We do think that there is a chance that the industry will sig- nificantly consolidate over the next decade," Skou said in Maersk's August earnings call, adding that was speculation. But given the pace of deal-mak- ing this year, such a scenario no longer can be seen as hypothetical. Smaller carriers are asking them- selves whether they can compete over the long term. Maersk itself may well return to the M&A table, possibly as part of a strategic review that splits its energy and shipping businesses into separate entities. As Skou said, "We see in the industry that it's consolidating, and we see that the big carriers are grow- ing more than the small, and we want to make sure we maintain our lead- ing position." An acquisition of the belea- guered Hyundai, Hanjin, or both, gives any buyer an enhanced posi- tion in the Korean BCO market — not a small prize. Is a single Japan line in our future? These are no longer idle questions. But irrespective of how it hap- pens, fewer carriers operating in fewer alliances gives ship lines key advantages: better control over capacity and, importantly, reducing the number of carrier salespeople out on the street cutting rates, whether spot or contract. "The industry has suffered from retail overcapacity versus vessel overcapacity. The car- riers have not been able to say 'no' to freight," Newsome said. The recent trans-Pacific service contracting season showed the truth of that. BCOs didn't ask for $675-per- FEU rate levels; the carriers in many cases offered them without so much as a negotiation. As Pat Moffett, vice president of global logistics at Voxx said in reference to his new trans-Pacific contract: "I had lunch with the Voxx CEO last week. He said, 'I can't believe these rates! Great nego- tiations, Moffett.' I replied, 'Chief, I didn't negotiate a thing. All I said was hello and the rate dropped.'" It's not a law of economics that high utilization levels must translate into low rates. In fact, the opposite is more likely the case. Which is why logistics directors, especially those operating in head-haul lanes, should be raising a red flag with their inter- nal partners that the good times may not last much longer. JOC Contact Peter Tirschwell at and follow him on Twitter: @petertirschwell. THIS MOMENT WON'T LAST

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