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:

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:



Rate Amount


Maersk Line


‘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.’



No explanation provided

NYK Line


‘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?


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