Are We Heading Into The 3rd Surplus of Bottoms?

In maritime connotations, a “surplus of bottoms” means there is a general surplus of ships which can mean marginal loads to survive and worse a fare and freight war occurs. When this happens some shipping companies do not survive and so a “correction” (this term is used in Business and Economics) occurs but that can mean ships going to the breakers or being idled.

The first surplus of bottoms happened in the start of the 1980’s and that happened in the year 1980 and in the succeeding years. It became even more pronounced when the financial and political crisis hit the country in 1983 after the assassination of the opposition political leader Ninoy Aquino.

What triggered the surplus of bottoms in 1980 was the arrival of the new container ships which changed the system of carrying cargo. Before their arrival it was the passenger-cargo ships which carried the express cargo (the cargo that have to be moved fast). There were actually only a few cargo liners (cargo ships that have regular routes and schedules) before the arrival of the container ships. Passenger-cargo ships before 1980 have voluminous cargo holds (holds because there were not RORO liners before 1980 except for two, the third Don Carlos of Sulpicio Lines which arrived in 1977 and the Don Johnny of Lorenzo Shipping which arrived in 1976).

But when Sea Transport Company, Aboitiz Shipping Corporation, William Lines, Sulpicio Lines and later Lorenzo Shipping Corporation and Central Shipping Company (the vargo company of Sweet Lines) invested in container ships, suddenly the old passenger-cargo ships especially the former “FS” ships suddenly had no enough load and many were laid up and they rotted and were later sold to breakers especially during the financial and political crisis of the mid-1980s when the country’s growth rate turned negative.

Cargo is the bread and butter of shipping and it is not the passengers that make them viable. The major shipping lines were just too happy then to invest in container ships for they can move cargo without employing too many crews that go with the operation of passenger-cargo ships. With container ships there won’t be complaints about delays, insurance goes down, there is no need to stack up on food, etc. Operation became more simple with less risk. But that paradigm change meant a lot of old passenger-cargo ships will have to go because of a surplus of bottoms and that surplus became more pronounced when the mentioned crisis  hit.

There were more than a dozen shipping companies which did not survive this first surplus of bottoms especially in the crisis and among them were the old venerable Compania Maritima (which was the biggest shipping company for decades already), the various small shipping companies to Bicol and the Eastern Visayas which were also greatly affected by the development of intermodal shipping, the Northern Lines, Madrigal Shipping Company, Tomas del Rio & Company (the former Rio y Olabarrieta) and others.

The second surplus of bottoms period hit at the tail end of the administration of Fidel V. Ramos and it spilled into the terms of Joseph Estrada and Gloria Macapagal Arroyo. This period covered the late 1990s and the early 2000s and this was more pronounced in the liner sector like the first surplus of bottoms period.

The cause of the second surplus of bottoms period was actually the incentives given by Fidel V. Ramos to shipping when the acquisition of surplus ships from Japan quickened fast and many new players emerged not only in the  liner sector but also in the tramper sector which is actually in competition with the cargo liner sector. This second surplus of bottoms was exacerbated by the emergence of the budget airlines and the intermodal trucks and buses which took passengers and cargo from the liner sector.

In the second surplus of bottoms period the negative effect was more widespread. It happened in the High Speed Craft (HSC) sector when the arrival of the SuperCats, Sea Angels, Weesam Expresses, Bullet Expresses and others were simply too fast for the actual passenger growth. And this was worsened too by the Asian Crisis of 1997 which dampened business. One result was that we needed to sell High Speed Crafts outside the country.

In some short-distance ferry routes like in Batangas and Zamboanga this surplus of bottoms resulted in dog-eat-dog completion where fare and rate wars erupted. It was good for the passengers, car owners and shippers initially but this also meant that the financially weaker (but not necessarily smaller) shipping companies won’t survive. Among the notable casualties in Zamboanga were the Sampaguita Shipping Lines and SKT Shipping which later reincarnated into the KST (Kong San Teo) Shipping (but which also went under).

In Batangas, the formerly dominant Viva Shipping Lines and its legal-fiction companies also sank along with some other smaller shipping companies. In Cebu there was also a show of surplus bottoms but not as great as in Batangas and Zamboanga. Funnily, someone who has no knowledge of shipping, Myrna S. Austria made a Ph.D. thesis of this period and declared that so many routes lack competition. And the many routes and shipping companies disappeared because in truth there was so much competition (her data was incomplete and she didn’t know that parallel routes compete).

And like in first surplus of bottoms era a “correction” happened. What is sad here is we lost so many liners and liner routes. WG&A and Cebu Ferries Corporation shrank to just about a third of its former size and SuperCat to just less than half of its peak. The pioneer in fastcrafts Bullet Express (later Bullet Xpress) also disappeared along with some other High Speed Crafts operators.

After this the acquisition of ships went into doldrums that for a good ship spotter it became hard to maintain interest in shipping. But recently the ship spotters were jolted by new acquisitions especially since many are actually brand-new. The FastCat series started this trend and was followed by the Starlite series. Many other shipping companies are quickening their acquisitions including in High Speed Crafts and Medium Speed Crafts (MSCs). Competition drives many of these new acquisitions. But in the case of Island Water and Shogun Shipping theirs is trying the waters their own way.

These developments happened in the backdrop of the development of a new paradigm, the Cargo RORO LCTs which take rolling cargo away from the overnight ferries and the short-distance ferries. There are many shipping companies now in this sector and the LCTs involved here are nearing the two dozen mark. Like when the container ships first arrived, the operation of a Cargo RORO LCT is simpler than that of a ferry and they are wanted as suddenly they became the solution to the second-class treatment of trucks in ferries.

At the moment these new developments are beneficial to the passengers, car owners and truckers/shippers as there had been a lowering of rates in some routes and places. Plus there are more options and schedules now.

MARINA (Maritime Industry Authority), the regulatory body of the government with regards to the maritime sector will always push for the acquisition of new ships in their goal of ship modernization. And they will always think that more is better. And everybody is happy when a new ship arrives.

The question is will this lead to the 3rd surplus of bottoms? Well, it’s a little early to say but we know the shipping companies are still in the acquisition mood and we do not know up to when this optimism will end. The banks are open now for loans unlike before and the series of FastCats which can sail for as long as they want and the Starlites are not yet finished in arriving. Ferry companies have also discovered China sources now both in brand-new and surplus.

What is the antidote to a surplus of bottoms? That is the threat of MARINA to cull old ships, most of which are still running reliably and many of their companies have no record of losing a ship. Almost all are opposed to this and MARINA knows that. That is also not popular to the public as we are sentimental of our old ships.

We will have to see how this episode plays out.