2009 will be another rock-and-roll year for the liner shipping industry. In the face of a 6.5 million-TEU order book (equal to 55 percent of current world capacity), the economic viability of most international carriers will be tested beyond what I’ve seen in my lifetime. Even with modest growth in world trade over the short term, it is clear that the likely imbalance between supply and demand for space will force a number of results:
-- Major liner operators will have to continue to cut capacity.
-- This will put new pressure on rates.
-- Low rates will bring about extraordinary focus on costs and efficiencies.
-- Cost of capital will be higher than we have seen it in the past 25 years, stressing viability. Debt will be expensive, and equity will be scarce.
-- Recapitalizations will be very tough to execute, and those who do so will pay a lot.
-- Failures will rise and so will new combinations as a result.
-- As all this plays out, service disruptions could increase.
What does this mean for shippers? First, make sure your primary carriers are financially strong. Check their balance sheets carefully. If they are public, look at their cash flow and debt covenants. Find out if and when major payments are coming due? How are they likely to react when profitability disappears or is marginal? Make sure your service needs are understood and that your carrier is not going to leave your freight in distress. Know your sales representative, but also get to know management at least two tiers up. Try to deal with sophisticated carriers that have strong infrastructure, including information technology that gives them and you an efficient way to plan and track shipments.
Finally, spread your business around a bit more than you might normally do. That’s playing it smart.