The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (35 page)

Demand, robust through it was, could not possibly keep up with this explosion of supply. The result was a new and painful experience for the shipping industry: a rate war.

Overcapacity was an old story in ocean shipping. The flow of cargo had always been volatile, based on economic growth, changes in tariffs and trade restrictions, and political factors such as wars and embargoes. In the 1950s and 1960s, though, a temporary imbalance between the amount of space on breakbulk ships and the amount of general cargo usually was not a fatal problem. The war-surplus ships that filled most merchant fleets had been acquired for little or nothing, so shipowners were not saddled with huge mortgage payments. Their main expenses—cargo handling, fees for the use of docks, pay for crews, fuel—were operating costs. If business was bad, the ship-owner could lay the vessel up and most of the costs would go away.

The economics of container shipping were fundamentally different. The huge sums borrowed to buy ships, containers, and chassis required regular payments of interest and principal. State-of-the-art container terminals meant either debt service, if a ship line had borrowed to build its own terminal, or rent, if the terminal was leased from a port agency. Those fixed costs accounted for up to three-quarters of the total cost of running a container operation, and they had to be paid no matter how much cargo was available. No company could afford to lay up a containership just because there was too little cargo. So long as each voyage collected enough revenue to cover operating costs, the ship had to keep moving. In container shipping, quite unlike breakbulk, overcapacity would not diminish as owners temporarily idled their ships. Instead, rates would fall as carriers struggled to win every available box, and over-capacity would persist until the demand for shipping space eventually caught up with the supply.
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Overcapacity preoccupied everyone connected with containerization. “Now that standardized containers have been introduced, the rush to ‘get on the bandwagon’ will probably lead to substantial overexpansion,” a study for the British government warned in 1967. By one early estimate, 5 ships carrying 1,200 containers each, sailing at 25 knots, could move all of the U.S.-UK trade that could be containerized. By another, just 25 ships could handle the entire general-cargo trade between Europe and North America. A third estimate foresaw that the 5 ships ordered by the American carrier Farrell Line would be adequate for all of Australia’s exports to the United States. With hundreds of containerships on order, experts projected that half the available container slots across both the Atlantic and the Pacific would go unused by 1974. In the North Atlantic, “by the early 1970s there will be excess container capacity,” a study for the U.S. government predicted in 1968.
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The wolf was at the door even sooner than anticipated. In early 1967, less than a year after fully cellular containerships entered the trade, the North Atlantic conferences cut rates for containers by 10 percent—an action that a leading U.S. shipping executive termed “a disaster.” That was only the beginning. With too many ships chasing too little cargo, the long-standing structure of ocean freight rates began to fall apart.
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Prices for international shipping, unlike domestic shipping, usually were not set by government regulators. Instead, rate setting was the realm of liner conferences, voluntary cartels of the operators on each route. No fewer than 110 different conferences set rates on routes to or from the United States, and similar conferences governed routes elsewhere in the world. The conference members negotiated a rate schedule among themselves and often assigned each member ship line a percentage of the total traffic. All shippers using conference carriers were supposed to pay the official rates, with no special deals, although cheating was common; “rebating,” secretly refunding part of a shipper’s payments, was a widespread if illegal practice. Conferences in trades serving the United States were required to publish their rates and to be “open”—that is, to accept new lines that wished to join—but many other routes around the world featured confidential rates and “closed” conferences that excluded newcomers. On most routes, governments did not require ship lines to be conference members—but if a carrier began operating as an “independent,” it was likely to find the conference letting its members slash rates and add capacity in order to destroy the intruder. Most of the time, all carriers had an interest in going along with the system.
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The conferences structured their rates very much as railroads did. There was a separate rate for each commodity, or sometimes two rates, one measured by weight and one by volume. For breakbulk shipping, there was logic behind this: some commodities were more complicated to load than others, some took more shipboard space and some less, and different rates were a way to recognize the differing costs. Applied to containers, the commodity-based system made no sense at all: a ship line’s cost to move a 40-foot container of bicycle tires was identical to its cost for a 40-foot container of table lamps. When containers appeared, though, the conferences, dominated by companies that still sailed breakbulk ships, relied on the tried-and-true system of commodity-based rates. On the North Atlantic, the rate per ton for a product shipped in a container was the same as if it were shipped breakbulk, with a discount of 5 to 10 percent for a full container of a single commodity. Rates for mixed freight made even less sense. When the Europe-Australia conference set container rates in 1967, a year before containership service opened, it decreed that each commodity in a mixed container would be charged the per-ton rate for that commodity. The only way to find the correct rate was to open the container and weigh every single item inside.
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This economically illogical system could not last. Ship lines had no reason to care what was inside the containers they carried, and with rampant excess capacity they were willing to accept any payment that exceeded their cost to carry the container. By early 1967, Waterman Steamship, Malcom McLean’s former company, switched to a flat rate for shipments from the United States to southern Europe: $400 for a shipper-owned 20-foot container, $800 for a 40-foot container, regardless of the contents. Waterman did not yet have any containerships and its rate structure had no imitators, but its move reveals the pressure on prices. Carriers began threatening to leave their conferences unless rates came down. The conferences struggled vainly to keep the rate structure intact. In the summer of 1969, the transatlantic conference system blew apart. Eight lines formed a new conference with the aim of leaving commodity-based rates behind and establishing rates that made sense in the world of containers.
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As the artificially high rate structure collapsed, ship lines faced profit squeeze. Restructuring was the only way out. In July 1969, barely three years after container shipping had become an international business, West Germany’s two biggest shipping companies agreed to merge as Hapag-Lloyd, a huge new player in the North Atlantic. Three months later, Malcom McLean responded in kind. McLean had always preferred consolidation to competition; had the U.S. government not blocked him, he would have acquired Sea-Land’s sole East Coast competitor, Seatrain Lines, in 1959, and its main competitor to Puerto Rico, Bull Line, in 1962. Now, on Sea-Land’s behalf, he committed $1.2 billion of R.J. Reynolds’s money to an audacious deal with United States Lines. U.S. Lines was in the midst of building 16 containerships, all able to carry more than 1,000 containers and to steam faster than 20 knots. It would soon have the greatest containership capacity of any line. Sea-Land proposed to lease that entire fleet, all 16 vessels, for 20 years. U.S. Lines would surrender its status as a subsidized carrier, which would allow Sea-Land to deploy the ships wherever it wanted, without government approval. A major competitor would be out of the game, and Sea-Land would become by far the largest ship line on both the Atlantic and the Pacific.
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Competitors cried foul—but they reacted promptly. In early 1970, Grace Line was merged into Prudential Lines. Matson surrendered its international ambitions, selling its ships in 1970 and giving up its efforts to turn Honolulu into a hub for commerce across the Pacific. Moore-McCormack Lines sold its four newest freighters and exited the North Atlantic. Two British carriers, Ben Line and Ellerman Line, joined forces on the UK-Far East route, and three Scandinavian companies combined their ships to create a single international carrier called Scanservice.

Those shifts were far from enough to stabilize the industry. In the Australia trade, Overseas Containers Ltd. lost $36 million between 1969 and 1971. Hapag-Lloyd suffered losses in 1969, 1970, and again in 1971. On the North Atlantic, where one-third of containership capacity was unutilized, American Export Isbrandtsen Line lost so much money in 1970 and 1971 that its parent company’s shares were suspended from trading on the New York Stock Exchange and its president was forced out. U.S. Lines, operating in both the Atlantic and the Pacific, lost $14 million in 1970 and as much again the following year. Even Sea-Land had a difficult passage after the U.S. government blocked its efforts to combine with U.S. Lines, its profit falling from $39 million in 1969 to $21 million in 1970 and barely $12 million in 1971. R.J. Reynolds, like the other conglomerates that had invested in ship lines, was learning that container shipping was not the gold mine it had imagined.
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In desperation, the leading carriers on important routes tried an old-fashioned solution: reducing competition. Five competitors in the Europe-Far East trade, two British, two Japanese, and the German Hapag-Lloyd, combined their Pacific interests in an alliance called TRIO. Among them, the companies agreed to build nineteen large ships, with each company allocated a number of container slots on each ship. A second Europe-Pacific consortium soon followed, with the Swedish carriers and the Dutch company Nedlloyd merging their Asian operations into a company called ScanDutch. Those two alliances drastically cut the number of competitors between Europe and Japan, helping stabilize rates. An even more powerful cartel, the North Atlantic Pool Agreement, was born in June 1971. The pool agreement, strongly backed by six European governments, combined the efforts of what had been fifteen separate ship lines from six countries. It spelled out exactly what percentage of the total cargo each company would carry. All of the members agreed to charge identical rates, and revenues from North America-Europe service were to be shared. The cartel managed finally to put a floor under rates. “Without the pool, a lot of us would go under,” one executive admitted in 1972.
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Economic growth around the world picked up in 1972, and with it the flow of trade. Container tonnage nearly doubled from 1971 to 1973, and as carriers finally found enough cargo to fill their ships, they earned profits once more. But the shipping industry that survived the carnage of containerization’s first rate cycle was quite different from the one that had existed in 1967. Far fewer independent companies were left, and they had no illusions about the future. Rate wars would obviously be a permanent feature of the container shipping industry, recurring every time the world economy turned down or ship lines expanded their fleets. Shippers would pay according to the distance their containers traveled, regardless of the weight or the nature of the contents, and in difficult times rates would dip so low that carriers would barely cover their operating costs. Ship lines would be under constant pressure to build bigger ships and faster cranes to reduce the cost of handling each container, because at some point overcapacity would return, and when rates collapsed the carrier with the lowest cost would have the best chance of survival.
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The next collapse was not long in coming.

The years 1972 and 1973, as it turned out, represented a peaceful interlude in an economically turbulent decade. Industrial production rose 18 percent in the United States, 19 percent in Canada, 22 percent in Japan, 12 percent in Europe. International trade grew strongly enough to transform the glut of container shipping into a shortage, despite the launch of 143 containerships in just two years. The sharp rise in oil prices that began in 1973 proved initially to be an unexpected blessing for the maritime industry, giving containerships, which transported more cargo per barrel of oil, a further cost advantage over the remaining breakbulk ships. The amount of containerized ocean cargo around the world rose 40 percent in 1973 alone. Companies ordered their ships to reduce speed in order to conserve fuel, cutting the number of voyages they could make over the course of a year, which further tightened the market. Freight rates soared, as conferences pushed through hundreds of rate increases and added surcharges to cover exchange-rate movements, higher fuel costs, and port delays. “Many shippers, faced with rate increases of over 15 per cent plus surcharges, must have found their freight bills increased by as much as 25 to 30 percent,” a United Nations report declared.
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The boom lasted into 1974, when a weaker dollar drove exports from U.S. factories up 42 percent in a single year. Rate increases, along with the various agreements around the world to limit capacity, pool revenues, or join forces, finally worked magic on the shipping industry’s bottom line. Sea-Land reported a healthy $142 million profit, up from $16 million in 1973. Even U.S. Lines, which had seen little besides red ink out of its sixteen new containerships, posted a $16 million profit for 1974. Judged the head of Atlantic Container Line, “If an operator can’t make it on the North Atlantic now, he will never make it.”
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The oil crisis, though, ended up devastating the shipping industry. The world economy tumbled into recession in the second half of 1974 as central banks tightened monetary policy to counteract the inflationary consequences of dearer oil. Industrial production collapsed, and with it the flow of trade. World exports of manufactured goods fell in 1975 for the first time since the war, and the amount of seaborne trade dropped 6 percent. Even as trade flows diminished, shipyards kept delivering new containerships—and every new ship weakened the ship lines’ ability to hold rates up. Containerships from the Soviet Union joined the competition in both the Atlantic and the Pacific outside the conference structure, pressuring rates further. The shipping conferences were forced to roll back or eliminate surcharges six hundred times between 1974 and 1976.
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