Demand versus counting beans

Shipping and the port industry are no different from any other except for the fact that they have historically been used to operating with hidden and not-so-hidden subsidies. Like any other industry the issue is supply and demand. Pricing is a result of the relationship between the two, yet the bean counters (accountants in management) have spent years focusing on cutting costs rather than addressing the core issue of excess supply versus insufficient demand to deal with the downward pressure on prices.

Having run out of things to cut in costs on their own, the carriers are turning to ever larger alliances as the elixir for success, but this is just another means of cost cutting. Driven by economies of scale and reduced slot costs, with vessels of 18,000 plus sailing at an average speed of 18 knots or less, this is nothing more than an exercise is reducing corporate costs while at the same time diminishing the individual ability to differentiate services.

The same is true of ports and terminal operators. Big is better: see London Gateway, HPH, Maasvlakte II, Wilhelmshaven, Shanghai to name a few. The only new business is winning market share through lower pricing.

What the industry repeatedly seems to forget or ignore – both indefensible – is that the understanding of the basic tenant of economics suggests that when supply exceeds demand, no amount of cost cutting will impact pricing. Since 2007 demand has been in the doldrums and does not look like it will change significantly any time soon, yet capacity growth has continued to ignore this and with too much space around it is obvious that shippers will baulk at price increases and competitive, knee-jerk reactions from carriers and port users will cause prices to drop. Seems simple, does it not?

The answer to the industries problems is to drastically reduce capacity, otherwise known as scrapping ships in significant enough numbers to bring the supply and demand curves to the point where prices will rise. Will it happen? Not for a few years – carriers are too focused on mega alliances at the moment rather than on the core problem.