With analysts estimating that oceangoing shippers could lose up to $10 billion worldwide this year, the industry that made globalization possible is sinking into crisis.
To survive, shippers are merging, signing swiftly assembled alliances and slashing costs.
The pain isn’t felt on foreign shores alone. Los Angeles and Long Beach, home to the nation’s busiest port complex, are fighting for an increasingly smaller piece of a shrinking shipping market.
At the same time, the ports face hundreds of millions of dollars a year in infrastructure projects to stay competitive.
“The industry is consolidating for survival,” said Michelle Grubbs, vice president of the Pacific Merchant Shipping Association, a trade group. “They are losing so much money. They have to reduce their costs.”
Uncertain seas
Recent shifts on the currently unsettled trade seascape are significant:
• Profits are plunging at the largest shipping company, A.P. Moller-Maersk A/S, which announced this week a 43 percent decline in third-quarter profits. It comes as Japan’s biggest shipper, NYK Line, anticipates a near $2 billion loss for the first half of the year.
• Just last month, Japan’s three biggest sea carriers — confronting declining freight rates, sluggish demand and fleets with too many ships — merged to create the world’s sixth-largest box carrier. China’s largest carriers, China Ocean Shipping Co. and China Shipping Group, are in the midst of merging, too.
• Federal regulators last month approved Ocean Alliance, a partnership between some of the world’s largest shipping companies — China’s Cosco Group, Hong Kong’s Orient Overseas Container Line, France’s CMA CGM and Taipei-based Evergreen Marine.
A similar alliance is already in place and another one made up of some the world’s biggest sea carriers is awaiting approval.
Most of the globe’s goods shipped by sea will travel via one of the three such alliances, which allow shippers to share ships, trade routes and charter space.
• Struggling seaborne cargo movers are seeking ways to streamline. One approach is building bigger ships that can carry more goods and reduce the number of trips.
However, such cost-cutting isn’t always fool-proof: Too much capacity can drive down prices.
It’s a tumultuous new world for shippers. “It’s a very big global change,” Grubbs said. “I think you are going to see shifts everywhere.”
Ports in a quandary
The crisis poses a quandary for ports in Los Angeles and Long Beach.
The giant cargo hubs operate like landlords, wooing shippers to sign leases to unload goods at their massive terminals.
The ports shell out hundreds of millions of dollars to stay current and competitive, building cranes, improving wharves and otherwise maintaining an aging infrastructure.
In turn, the ports ask their tenants to bring in a minimum amount of cargo each year or pay a fee on top of the lease.
The rents also pay off bonds used to pay operating expenses and to build projects such as the Gerald Desmond Bridge.
But a marketplace in disarray could challenge this economic model.
Nearly 40 percent of the nation’s trade with Asia runs through the twin ports and its 13 different container terminals. But many of those terminals are subsidiaries of shipping lines, the very ones that are struggling to stay afloat.
Alliances and mergers can pose a problem for the twin hubs. The majority of their leases with terminal operators predate many of these deals.
“What we don’t know today,” said Noel Hacegaba, chief operating officer of the Port of Long Beach, “is how will the volume by these new alliances be distributed across the terminals.”
For example, Hanjin Shipping Co. has a majority stake in Long Beach’s Total Terminal International. The seventh-largest carrier in the world collapsed this summer, sending import-dependent Southern California into a tailspin. The rest is owned by Mediterranean Shipping Company, the world’s second-largest box carrier.
Who purchases Hanjin’s stake could further complicate the port scenario. MSC owns a stake in another terminal at Long Beach and is aligned with two more terminals in Los Angeles.
It’s uncertain whether MSC, as it absorbs Hanjin’s streamlined assets, will be able to maintain the minimum shipping numbers required by their leases at each terminal.
Following suit?
Jock O’Connell, an international trade adviser at Beacon economics, said as alliances reconfigure, the terminals may take a similar route to shippers, consolidating their resources and cutting costs.
Of the ports’ long-term leases with terminal operators, more than half are up in the next eleven years.
There are signs, analysts say, there may be more terminals than are truly needed, especially as bigger ships result in fewer trips.
Los Angeles’ strong growth this year could mean that newly allied shippers have chosen their docks, O’Connell said.
But those fortunes could change as the new order shakes out, he added.
Paul Bingham, who manages trade and logistics analysis for Economic Development Research Group in Boston, pointed to a potentially grimmer view.
Earlier this year, the Port of Oakland saw tenants of their second-largest terminal drop out of a 50-year lease.
Outer Harbor Terminal LLC, a venture between Ports America and MSC-affiliated Terminal Investment Ltd., said they were bowing out to refocus on other properties in Southern California and Washington. At the time the operator inked that lease in 2009, it promised to invest more than $600 million in the Oakland port by 2020.
Outer Harbor said it pulled out in part because — unlike Southern California — Oakland wasn’t considered crucial to trade routes. But, he noted, “the general lesson is an important one. Things are not as stable in the port environment.”
“Things you could count on in the past are no longer the case,” he said.
That uncertainty prompted bond-ratings company Fitch to issue a report last month that raised questions about the risks U.S. ports face in the wake of shipping-industry consolidation.
“It is something we are watching and we are definitely asking the ports about,” said Emma Smith, director of global infrastructure and projects for the agency. “What does it mean for where the boxes are going? We still don’t know.”
“There will be certain ports,” echoed Grubbs, “that will be winners and losers in this.”
