Crisis at shipping companies could impact local ports
Updated 10:10 p.m.
Gerald Desmond Bridge rises in the distance as the MCS Pena approaches the Port of Long Beach, part of the nation’s busiest port complex. (File photo by Jeff Gritchen, Orange County Register/SCNG) , Gerald Desmond Bridge rises in the distance as the MCS Pena approaches the Port of Long Beach, part of the nation’s busiest port complex. (File photo by Jeff Gritchen, Orange County Register/SCNG) , By RACHEL URANGA / STAFF WRITER
The industry that made globalization possible – shipping – is sinking into crisis. This year, oceangoing shipping companies could lose, collectively, £10 billion. Consumption of international goods never fully bounced back after the recession, creating a glut of capacity with too many vessels bobbing at sea.
To survive, shippers have been 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.
Adding to the woes is a new uncertainty: the election of Donald Trump, who campaigned on U.S. trade policy and is promising to rework key international agreements. 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 Michele 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:
o Profits are plunging at the largest shipping company, A.P. Moller-Maersk A/S, which recently announced 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. o 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, also are merging. o Federal regulators recently 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. o At least one other similar alliance is awaiting approval, and most of the world’s goods shipped by sea will travel via one of three such alliances, which allow companies to share ships, trade routes and charter space. o 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 foolproof: 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.” IN A QUANDARY
The crisis poses a quandary for the 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 container terminals. But many of those terminals are subsidiaries of shipping lines, including the very ones struggling to stay afloat. What’s more, the majority of leases at the ports were struck before the recent spate of alliances and mergers, creating a complex network of financial obligations.
“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 Co., the world’s second-largest box carrier. Korea Line Corp. reportedly signed a deal this week to buy most of Hanjin’s assets but not its stake in the terminal, which could further complicate the port scenario. Mediterranean Shipping Co. owns a stake in another terminal at Long Beach and is aligned with two more terminals in Los Angeles.
It’s uncertain whether MSC, if 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 11 years. Analysts say there may be more terminals than are 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 tougher view. Earlier this year, the Port of Oakland saw tenants of its 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 it was bowing out to refocus on other properties in Southern California and Washington state. 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, which filed for Chapter 11 bankruptcy protection in February, said it pulled out in part because Oakland, unlike Southern California, wasn’t considered crucial to trade routes.
But, Bingham 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.” Shipping trade group executive Grubbs agreed.
“There will be certain ports that will be winners and losers in this.”
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