Developments concerning the ocean container shipping industry are now moving at a faster and more discernable pace. Last week featured the news of the consolidation of Japan’s three largest shipping lines. This week adds even more perspective to an industry that is now facing even more structural and other changes. Shippers, transportation procurement teams and indeed maritime regulators need to be prepared to respond to the ongoing implications and not be lulled into predominant one dimensional cost savings strategies.

Yesterday, industry leader A.P. Moller-Maersk announced financial performance for the September ending quarter and the news was not good, not even for the industry leader.  The headline was a 43 percent plunge in overall profits. Maersk Line, the ocean container business unit incurred a loss of $122 million from a $243 million profit in the year ago quarter, despite container shipping volumes rising 11 percent in the quarter. That double-digit volume rise is noticeably above actual industry shipping demand, implying that market-share volume shifts are perhaps underway.

Maersk CEO Soren Skou indicated that shipping rates bottomed at the end of the first quarter and are slowly rising due to the departure of Hanjin Line shipping vessels from global routes. He further indicated that Maersk has observed a general rise in rates averaging 5.5 percent since the second quarter, but keep in-mind that the spot rate base remains below break-even profitability. Of more interest, the CEO validated that industry consolidation is set to continue and that nobody could have expected how fast it is now occurring.

Of far more interest to this author was what was further indicated to The Wall Street Journal. The CEO declared: “In 1996 the top three carriers had 17 percent combined market share. By next year the top three carriers will have 43 percent market share, and it’s not going to stop there.”

That statement, by our lens should be of concern to shippers and regulators alike.  While most shippers may be inclined to appreciate the cost saving benefits of historically low transport rates, it seems rather obvious that the battle for market share and industry dominance is underway among top-tier carriers. The winners will obviously be those with the largest financial pockets and backers and the prize is global scale and industry dominance. The WSJ reported this week that cumulative financial losses for this year could be as high as $10 billion, which is double the recent forecast from industry advisory group Drewry.

We would add that the formation and approval of existing multi-line shipping alliances could possibly be a further enabler to market-share dominance. Competing or non-aligned shipping lines are therefore under even more pressure to further consolidate or risk intolerable financial losses. Meanwhile industry leader Maersk has already indicated that it will seek further opportunities to acquire other attractive lines if the opportunity presents itself.

In a separate interview with the WSJ, the vice-chairmen of CGA CGM, the third ranked global shipping line indicated that none of the 20 top shipping companies are likely report operating profitability this year. He further indicated that his firm is not looking to further acquisitions after recently acquiring Singapore based Neptune Orient Lines.

This week, the Boston Consulting Group added its industry research perspectives in a report: The New Normal in Global Trade and Container Shipping. (Sign-in account required) The report forecasts that shipping capacity will continue to outpace shipping demand by a range of 8.2 percent and 13.8 percent compared with a 7 percent imbalance today. BCG expects annual growth in global container traffic to range between a bear scenario of 2.2 percent and a bull scenario of 3.8 percent, with a base scenario of 3.2 percent through 2020. Further estimated: “that by the end of 2020, oversupply of vessel capacity will stand at 2 million to 3.3 million TEUs.”

These are yet further indications that industry supply and demand imbalance will extend for an additional four years without changes on either end. That again reinforces the building tide of industry consolidation or the opportunity for further market share penetration by the largest and more financially strong carrier groups. Dominant operation of today’s newer mega-ships has another implication, that being the current limited amount of ports that have the infrastructure and modernization to be able to load and unload such vessels on a timely basis. The timing and availability of leased container truck chassis remains a shipper and industry concern.

For shippers and services procurement team, the financially motivated strategy is to try and lock-in today’s historically low rates in longer-term contracts, before further consolidation changes the negotiating picture. That goal is sometimes complicated when transportation services are outsourced to a third-party logistics provider or global services provider, and whether savings are being passed along. However, with such a shipping industry supply and shipping demand imbalance compounded by added consolidation threats, it may be wise to allow for opportunistic spot-rate contracting for shipping, especially concerning carriers or global shipping routes that continue to be highly competitive.

The most prominent criteria for multi-industry internal transportation and logistics teams is, as always, to ensure that any ocean transportation services provider or third party logistics provider consistently delivers reliable on-time services and is responsive to unplanned events. The memories of the 2015 U.S. West Coast port disruptions and consequent implications for lost business remain top-of-mind. The need for planning and collaboration among internal finance, procurement, internal and contracted supply chain operations teams is therefore paramount.

Finally, we advise that shippers, brokers and logistics operators provide added pressures in 2017 for shipping lines and respective shipping consortiums to move beyond pooling of vessels and one-sided optimization of global routes and more into insuring consistent on-time and predictable delivery performance, augmented multi-modal container tracking, routing visibility and other customer focused improvements. The time is long overdue for industry-wide data and information exchange standards.

The takeaway is that ocean container transportation planning cannot be taken for granted in such turbulent times.

 

Bob Ferrari

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