Beyond logic: container shipping

Feb 29, 2012, 10:54AM EST

It’s without a doubt that container carriers have been hit hard by the rise in bunkers, not to mention the market share war that erupted last year on the Asia - Europe trade lane.

  See picture here: http://imgur.com/tH3ds

So when carriers announced a GRI for Mar 1 tomorrow, some attributed the $750/teu rate increase partly to a sharp increase in bunkers in 2011. The above picture speaks louder than words.  

 

With Maersk announcing a further $400/teu GRI for Apr 1, we are already starting to see the ‘Lemming effect’ exhibited all too often by the container industry. Below are the Apr 1 rate increases announced so far and the reasons behind them:

 

Carrier

Rate Amount

Explanation

Maersk Line

$400/teu

‘In order to continue offering our broad portfolio of services and high level of reliability, it will be necessary for us to implement the following rate increase/restoration.’

K-Line

$400/teu

No explanation provided

NYK Line

$525/teu

‘NYK will implement the second phase of its 2012 structural revenue recovery program (SSR)’

 

Behavourial economics demonstrate the fact that people accept the need for sellers (of a good or service) to pass on their own increased costs. It also demonstrates that people make illogical decisions, which creates mis-pricings and irrationality in a market place. Out of the 3 rate increases announced so far, none of the carriers have provided a detailed explanation of the logic behind the rate increases. So let’s have a look at a simple example.

 

A general store has been selling electric fans for $15. When a 7-day heat wave is announced overnight, the store raises the price to $20 the next morning. Some people might deem this to be unfair pricing. After all, one can only assume that the sale of electric fans will increase, but you can’t accurately predict that they will. So then what does the term ‘fair’ really mean? Container freight rates declined last year to $490/teu because supply exceeded demand. That is simple textbook economics. The extent of the decline was further exacerbated by carriers chasing for market share and larger NVOs leveraging their bargaining power for lower rates as carriers were seeking to fill their ships. Shippers became the major beneficiary.

 

Below is an equation of the function of freight rates:

 

F(Freight Rates) = supply + demand + market competition + herd behaviour (‘Lemming Effect’) + fear + greed

 

It seems that the Apr rate increase are NOT a function of market fundamentals, but unsystematic risk factors. Investors are demanding an explanation; carriers are burning cash and need to return to profitability; and shippers are starting to become fearful. So when someone who is not in the container industry asks, how do you justify a rate increase when there is still overcapacity in the market? I simply answer: ‘Because the container industry is irrational.’

 

When you have budgeted for your Asia – Europe freight rates to remain at 700 or 800 for the entire year and come tomorrow rates increase to 1300-1400, how do you tell your CFO that costs have doubled when supply still exceeds demand? What risk management strategy did you have in place?

 

 
Report abuse



Bookmark this page to:Add to Faves Add to MyAOL Add to Simpy Add to Delicious Add to Live Add to Digg Add to Newsvine Add to Reddit Add to Multiply Add to Blogmarks Add to Yahoo MyWeb Add to Slashdot Add to Mister Wong Add to Spurl Add to Furl Add to Link-a-Gogo Add to Yahoo Bookmarks Add to Twitter Add to Facebook Add to Diigo Add to Mixx Add to Segnalo Add to StumbleUpon Add to Magnolia Add to Ask Add to Backflip Add to Terchnorati Add to Google Bookmarks Add to MySpace

Comments
Blog post currently doesn't have any comments.

Sign in

Latest blog comments

There are currently no comments.

Post archive

February 2012(1)