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May 28 2018

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Commentary JOC Top Importers and Exporters BENEATH THE SURFACE May 28 2018 | The Journal of Commerce 69 Gary Ferrulli THERE ARE SEVERAL things worth watching in the ever-changing con- tainer shipping industry. First-quarter financial reports are coming out. The three carriers of the Ocean Network Express, or ONE, have independently provided their last individual reports for their fiscal year ending March 31. They showed a mix of good and bad — first-quar- ter volumes down year over year, and also compared to growth in the trans-Pacific. Two of the three com- panies did show a profit, however. Post April 1, while o‚cially commencing ONE, they apparently had some operational hiccups, and that might be expected. They may become more aggressive in pricing the trans-Pacific service contract renewals, even with the spot market taking a surprising 20 percent jump in the last week in April. By the time this is in print, the other carrier's first-quarter financial reports will be out, and that could be the bellwether for the year. There is speculation that there will be an early peak season this year, which could be the reason for the spike in spot rates. However, this could be a short-lived event, the spike due to carriers trying to bolster their position in the final days of negotiating the 2018-2019 contracts. These contracts are critical for carriers. They haven't taken advantage of the consolidation that's occurred, and instead have chased market share. But the rising price of fuel is impact- ing direct operating costs and indirect costs through payments to truckers on intermodal moves. Carriers use fuel prices as a diŒerentiator for select customers by not charging for it. They continue this practice with new service con- tract today. There are signs of this changing for door moves, with some carriers opting to end service to some locations and adding clauses in some contracts relating to increased inland costs. But history says this isn't likely to last, especially if mar- ket share continues to be the focus. The focus on "one-stop shipping" continues to grow, with CMA CGM buying into the CEVA initial public oŒering. That deal followed Maersk/ APM Terminals announcing their increased participation beyond ports and terminals, with a rumor that Hapag Lloyd is interested in buying Damco. If true, that would have Maersk internalizing again, as they did with Maersk Logistics. And MOL announced it will provide wider and deeper "logistics services," indepen- dent of ONE. I tie these actions to the an- nouncements by APL and Hyundai Merchant Marine on "faster" and more reliable services, with some guarantees on transit times, and plans of carriers plunging into tech- nology. These issues may diŒeren- tiate a carrier from its alliance part- ners and other competitors, trying to make something other than price the only diŒerentiator. Reports on capacity are con- flicting. HMM says it will double its capacity by the end of 2020. But even doubling its capacity will barely move it into the Top 10 in capacity, and make it just 25 percent the size of the top carrier. And pundits expound on the influx of new capacity into the market, portending a bleak future for carriers. Drewry, however, sees additional capacity coming online favoring the supply side with grow- ing global trade. It does, however, expect the new service contract rates and industry profitability to be virtually flat year over year. Soren Skou, Maersk chief exec- utive, says government subsidies are bad for the industry, and they should stop. I don't think there is much of a chance of that happening. Over the course of my 45-plus years in the business, many governments have been in and out of subsidizing shipping lines. The United States, South America, some European and Asian countries, and the Middle East have eliminated or greatly reduced subsi- dies. But Korea, China, and Taiwan actively subsidize their shipping in- dustry, directly and indirectly. There are some lingering indirect subsidies elsewhere, but the Asian countries are by far the ones continuing to be heavy contributors to their maritime interests. This presents issues for carriers required to make a profit to continue to exist. Governments have greater access to capital, giving subsidized carriers an upper hand. Some in the industry question whether those subsidized carriers are really prof- it-oriented, or if the government is involved for other reasons. Some would say it's both; they don't create plans to lose money, but their purpose is to protect other local businesses, particularly manufacturing. There are solid links between manufacturing, banking, and shipping working together for the benefit of the local economy. But because they are part of a support system for their country's indus- tries, subsidized carriers have some ine‚ciencies, which could benefit their commercial counterparts. For-profit carriers should have a lower cost base. If the govern- ment-supported carriers are not truly profit oriented, then cost-related pric- ing isn't a priority. The same dilemma has been a part of the landscape during my entire career, and part of my reasoning on why shipping has a flawed business model. JOC Gary Ferrulli is chief executive o•icer of Global Logistics & Transport Consulting. Contact him at gferrulli@globallogistics On my 'watch' list Over the course of my 45-plus years in the business, many governments have been in and out of subsidizing shipping lines.

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