Matson CEO: Global container shipping in a 'nasty down cycle'
Matt Cox, chief executive officer of the Jones Act ocean carrier, says he would not be surprised if industry losses in 2016 exceed $10 billion, but Matson, which operates primarily between the U.S. mainland, Hawaii and Alaska, has limited exposure.The chief executive officer of Matson Line has painted a gloomy picture for the overall outlook for the container shipping industry, including expedited services from China to the United States.
Talking about the overall container industry in a conference call with analysts, Matt Cox said, “The overall market is in a very tough spot...this is the worst market I have seen in my entire 30-year career, and perhaps it goes further back than that. So we’re in a very nasty down cycle.”
He said several months ago a research service forecast international ocean carriers as a group would lose “something like $5 billion to $6 billion this year," noting that rates have fallen even further since then.
"And if they were to reforecast it, it wouldn’t surprise me to see...$10 billion to $12 billion of losses for the industry,” said Cox.
In the transpacific trade between Asia and North America, Cox says some carriers are quoting rates being that are below variable operating costs.
“This is clearly not sustainable. So something has got to give," he said. "The tough part is exactly when they’re done beating each other up and who can blink first.”
Matson has limited exposure to the international container shipping industry, primarily operating services between the U.S. West Coast and Hawaii and Alaska, trades that are protected from foreign competition by the Jones Act, which requires cargo moving between two points in the U.S to be moved on U.S.-flag ships, built in the U.S. with U.S. citizen crews.
However, one of its strings, the China-Long Beach Express (CLX), after sailing from Long Beach to Hawaii and Guam continues on to China and calls three ports there -- Xiamen, Ningbo and Shanghai -- before returning to Long Beach.
Matson says the eastbound service from China has been popular with shippers because of its rapid 10 day transit time from Shanghai to Long Beach and because it has a dedicated terminal and off-dock facility in Long Beach that provides faster truck turn times and container pick-up.
But Cox noted other companies are starting expedited services as well.
APL, for example, introduced a U.S.-flag expedited service last year that it calls Eagle Express between China, Korea and the U.S.
And Hanjin on May 24 will commence its new China America Express, which will offer 11-day transits from Shanghai to Long Beach. The other members of the CKYHE Alliance -- COSCO, “K” Line, Yang Ming, and Evergreen -- will also offer space on the string.
Matson said it expects its full year 2016 ocean transportation operating income to be approximately 15 to 20 percent lower than the $187.8 million achieved in 2015.
“70 to 80 percent of our expectations about our future rates are really related to the broad macro cycle and very unhappy outcome for the market on the BCO (beneficial cargo owner) annual contracting cycle,” with a smaller amount related to concern about other companies starting expedited services, said Cox.
"It’s a little bit of both, but much more of the market than the expedited service," he said.
Lars Jensen is chief executive officer of the consulting firm SeaIntel Maritime Analysis and he also knows something about the attractions and challenges of operating an express service in the transpacific. After leaving Maersk Line he was director of marketing and information technology at The Containership Company, which operated a service between Taicang, a small port upriver from Shanghai, Ningbo and Los Angeles in 2010-11.
Jensen says the drop in oil prices has made operating faster services attractive because carriers can, in the transpacific, for example, operate with five instead of six ships and eliminate the cost of a ship.
“That calculation makes sense if you can get rid of ship number six,” he said. “But in this environment, unless you have these ships on charter and they happen to expire, you can’t. That is probably why we have not seen substantial increases in speed on the main services. Because the savings that you would get by speeding up will not materialize if you cannot get rid of the ship.”
While carriers may say they want to offer expedited service to better serve customers, Jensen thinks the underlying reason is cost reduction.
A problem in the transpacific, he says, is that the trade is highly commoditized and it is difficult to raise freight rates even for a service with rapid transit times.
Cox noted that Matson had tried to replicate CLX by launching a CLX2 service into South China in 2010 that did not stop in Hawaii or Guam and used foreign flag ships.
Cox said if he used the same numbers from when Matson began the CLX2 and applied today’s freight rates, “these expedited services, which are primarily one haul and don’t benefit from the backhaul that we have, are probably losing, just these strings, $50 million to $60 million a year individually for the five-ship service.
"So clearly these are not sustainable services. The only question is how long will they suffer before they come to their senses.”
But Jensen said while carriers might be offering loss-making rates, "from the major carrier’s perspective, it might be a more appealing alternative to what is already a horrible market.”
He said that some of the decisions being made by carriers today, given the overcapacity in the market, are not necessarily driven by what is profitable, it is driven by the question: "what is the least loss.”
"I can understand the frustration, particularly from a niche carrier like Matson that has been very successful for several years in running a fast, reliable service," he said. "Now if the other main carriers speed up, that undermines part of the niche value proposition it has."
Jensen pointed to a parallel after the 2008-9 financial crisis.
"The world was awash in cheap charter tonnage," he said, and in addition to Matson's CLX2 and The Containership Co., other carriers such as Grand China Logistics, CSAV, Hainan PO Shipping and TS Lines started a raft of new transpacific services.
"Right now you have a very similar situation and with the widening of the Panama Canal you will get even more 4,000 to 5,000-TEU ships available at very low cost," said Jensen. "So there is at least a significant risk over the coming year that you may see opportunistic companies start some of these services in the transpacific knowing full well that the market is absolutely horrible, but on the other hand if you can get extremely cheap tonnage, you might have a viable business model either because you have even lower running costs than the established players or because you say 'I don't mind losing money moving containers as long as I can hold on to cheap assets and cash in once the market turns and my assets appreciate in value.'"