Ocean Freight: Keeping things afloat

April 15, 1912, marked the sinking of the RMS Titanic, an event that reverberated around the world and remains one of fascination, even today.

What many don’t know is that White Star Line, which owned Titanic, was a part of International Mercantile Marine Company, a trust put together and financed by J. P. Morgan. The goal was to establish stability in the boom-and-bust ocean business between Europe and the U.S. by creating a monopoly.

It didn’t work, nor—so far—have any subsequent efforts to bring the market to some sort of “normal” state of stability, despite consolidations and alliances.

Today, the boom-and-bust cycles in the ocean freight business largely remain. The industry has had a long and checkered history, with efforts to manage capacity and service, while turning a sustainable profit from those efforts being fraught with difficulty. Lately there has been substantial consolidation in the business through acquisitions and alliances, yet dramatic swings in pricing remain problematic for carriers and shippers alike.

Compounding the challenges in ocean carriage and, more specifically, the container ship business, are the disruptions around the globe with the crisis in the Red Sea and the drought affecting the Panama Canal. This has driven up costs and significantly impacted service as alternative routings have been undertaken to avoid the current flash-points.

Both shippers and carriers routinely go through the oft-dreaded annual RFP process in an effort to bring some form of order and rationality to their business, largely driven by a focus on keeping costs under control and service at acceptable levels. The advantage typically shifts between the parties, depending on levels of capacity available in the market. No magic here; lots of capacity, rates drop; tighter capacity, rates rise.

During the pandemic, rates shot through the roof. A 40-foot container rate of around $1,500 from Shanghai to LA/Long Beach pre-pandemic spiked up to as high as $23,000 and remained high for a sustained period. Of course, additional capacity hit the order books (some 478 new ships in 2021) only to have the bottom fall out of the market and rates decline back close to pre-pandemic levels. They then ratcheted up again with the severe disruptions in the Red Sea.

All of this makes the planning and forecasting much more of a crystal ball exercise than a science.

Is there an answer? How much value is there in market stability in terms of pricing, capacity and service? Or do we just accept this is the way things work and continue living with the continuous drama?

So here’s the question: If I am a shipper, is this landscape acceptable and just something to be endured? Or, is there another way to approach this to gain some measure of predictability and stability—smooth out the peaks and valleys that seem to be a continuing occurrence?

J. P. Morgan was a pretty smart, savvy lad, and he couldn’t solve this, so maybe it’s the best we can hope for, but perhaps some alternative operating models are worth exploring.

In a couple of recent columns, we explored the potential of variable rate pricing in order to stabilize capacity and availability for moving cargo in the trucking business. Perhaps the efficacy of a similar concept can be tested in moving container freight? Anyone want to step up to the plate?

Container ship capacity