State Subsidies - a Slippery Slope?
 
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State Subsidies - a Slippery Slope?

      12/7/2009

State Subsidies - a Slippery Slope?

A number of shipping lines have been seeking government bail-outs because of financial difficulties. Is it wise for governments to support an industry which has displayed such poor business judgment that has lead to the difficulties many now find themselves in? Should we not at least be demanding some fundamental changes in the way this sector works as a precondition to any government-backed bail-out scheme?

The shipping lines have too many ships searching for too little freight and yet still have more ships on order. Against the backdrop of declining freight rates, the lines are trying to cancel or postpone new ship orders and have removed some capacity from services; many of the chartered ships operated by the lines have been given back to their owners. Slow steaming is another strategy being employed by the lines along with reducing the services they offer, in apparently desperate attempts to save costs and improve the utilization of the capacity which remains in service.

Private ship owners in Germany have been looking for state aid also to help them cover their new ship orders; but it wasn’t that long ago that such people were making obscene amounts of money, and helping to feed the frenzy of new ship orders that the lines and now their customers are suffering the consequences of.

In 2007, the writing was arguably already on the wall: concerns were rife about over-tonnaging, the ever-increasing size of ships with fewer direct ports of call, rising fuel prices and growing concerns over the parlous state of the US Sub-Prime market: and yet nothing fundamental was done to avert the crisis which loomed.

Today, if governments now decide to prop-up the sector, what kind of message does that send out? “Don’t worry about making any bad or untimely investment decisions, because the state is here to help you out so that you can make more bad decisions in the future?” The same message has already been given to the banks; but at least there is an attempt to insist on some fundamental changes to the sector.

We should not forget the problems this crisis in the shipping sector creates for shippers: many are struggling to ensure deliveries come through in time to meet the demand from consumers: over the past year inventories have had to be reduced in order to save costs and better match consumer demand. Predicting consumer demand is still incredibly difficult and therefore regular, reliable services are even more important to maintain. The moves by the shipping lines, well understood as they are, ironically have resulted in less reliable services. Service alterations are happening all too frequently and with little or no warning: the carriers are operating in ‘crisis mode’ and not worrying about the consequences for their customers.

Many shippers are turning instead to air freight and incurring far higher freight bills rather than leave their customers wanting. This cannot be what liner shipping operators want…to see their customers go elsewhere, at a time they surely need all the customers they can get. But what exactly are they able to do in order to keep their customers?

Global trade volumes will, according to Shippers’ Voice partner MDS Transmodal, probably not recover to pre-recession levels until 2012; we will also see a shift in the pattern of trade: more growth in volumes in the west to east trades and intra-Asia trades than in the east-west trades (like Asia to Europe) seems likely. This will bring into question the type of services required, the ports of call, the number and size of ships required, the frequency and speed of services.


State Subsidies  


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