Sometimes I wonder whether people who tend toward extreme behavior are drawn to liner shipping. Or does the nature of the business cause temperate folks to go wild? Just two years ago, carriers yanked more than 500 ships out of service and put the brakes on nearly all new orders. Now, in addition to bringing back most of that laid-up tonnage, they're preparing to take delivery of huge numbers of new vessels, many of them over 10,000 twenty-foot equivalent units (TEUs) in capacity. During that same brief span of time, freight rates have gone from the Mariana Trench to the summit of K2. What's going on here?

Carriers' actions are partly a response to economic realities, of course. The Great Recession of 2008-2009 choked off consumer spending and turned much of the world's container fleet into ghost ships virtually overnight. Then, when demand began to recover, the lines scurried to make up for billions in lost revenue by jacking up rates to astronomical levels.

At the same time, it's tempting to view those developments as a continuation of decades of industry ups and downs. Every time carriers achieve a measure of stability in the market, they undermine their position by flooding the trades with fresh capacity. And the next couple of years looks to be no exception.

In the short run, shippers won't necessarily find themselves in the pilot's seat - not if several veteran industry observers are correct about the way 2011 will play out. Members of a panel at the Trans-Pacific Maritime Conference in Long Beach, sponsored by The Journal of Commerce, seemed to feel that supply and demand will be in rough balance for much of the year.

Start with the nation's short-term economic outlook. Mario O. Moreno, economist with PIERS and The Journal of Commerce, said U.S. gross domestic product growth is likely to hit 3.27 percent in 2011, up from 2.9 percent last year. (Sophie Loh, vice president with Morgan Stanley, put the figure at 4.4 percent, but when did practitioners of the dismal science ever agree on anything?) That should create fairly healthy demand for transportation services. What's more, the U.S. housing market, whose condition appeared terminal two years ago, might finally be out of intensive care. Unemployment is creeping downward, from 9 percent to 8.9 percent as of February of this year; Moreno expects it to average 8.7 percent for all of 2011. And consumer demand, which accounts for some 70 percent of U.S. economic activity, looks to be on the rise at last.

All of this should translate into a big boost in trans-Pacific container volumes, especially in the eastbound direction. Moreno says containerized imports from Asia should rise by 8.2 percent in 2011, with those from China growing 11 percent. Westbound traffic should increase by 11 percent as well, although from a lower base.

To meet the demand, carriers are returning to service their laid-up ships, which peaked at 581 in January 2010. That number represented 1.51 million TEUs, or 12 percent of the total containerized fleet, according to Tan Hua Joo, executive consultant with Alphaliner. As of March, 2011, the idle fleet was down to 107 ships, and will continue to dwindle through the balance of this year, Tan said.

But carriers intend to do much more than fire up the power plants of existing vessels. They're readying new and bigger ships with even greater economies of scale. Y.K. Kim, president and chief executive officer of Hanjin Shipping Co. Ltd., noted that trans-Pacific carriers grew their combined fleet by 9.2 percent in 2010. He expects further capacity increases of 8.8 percent in 2011, and 8.6 percent in 2012.

Set those figures against projected demand growth of between 6 and 9 percent (depending on whose figures you trust), and you get a picture that's not too out of whack in either direction. "I don't think there will be any sustained overcapacity this year," Kim said. "The supply and demand equation will not significantly deteriorate, and thus pressure on freight [rates] is not warranted or necessary."

Perhaps - but there are some warning signs to the contrary. Tan pointed out that the container-shipping industry "has never seen this much capacity coming in within such a short span of time." The trans-Pacific trade in particular "remains a significant concern," he added. "It's unclear whether demand growth for this year can sustain the increase."

On the shipper side, a lot depends on whether consumers are motivated to increase spending on anything other than items that are either deemed essential, or deeply discounted by retailers. Unemployment remains unacceptably high, with the recent good news possibly masked by large numbers of "discouraged" individuals who have stopped looking for work and therefore are not included in the numbers. The battle in Washington over federal spending creates additional uncertainties, especially if the mania for budget-slashing affects job-generating infrastructure programs.

Carriers, meanwhile, face the prospect of ever-rising operating costs, which threaten severely to erode margins. Fuel is by far the biggest concern, in light of continuing political unrest in Northern Africa and the Middle East. According to Kim, the average cost of bunker fuel rose from $476 per metric ton in 2010 to its current level of around $641. That translates into about $500m in additional costs per year in bunker alone. Carriers will attempt to pass that expense along to shippers, of course, but their efforts to raise freight rates could be frustrated by the additional ship space that they're bringing on stream. At the same time, global political turmoil could cause capital markets to think twice about supporting liner shipping.

Notwithstanding carriers' penchant for seesawing behavior, a return to their old trick of protecting market share through deep discounting is no option. Already this year, there are signs that they are focusing less on profitability than in 2010, Loh said, "but they are definitely not able to handle a sustained period of operating below their cost of capital." Profitability versus fair and competitive pricing: good luck striking the perfect balance.

- Robert J. Bowman, SupplyChainBrain

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