This is a time of enormous change for the shipping industry. Not only are there momentous changes in the sector, they are happening at a very fast pace. The market swings affect everything from stocks, shares, prices and the bottom line. This article examines some of the key issues that shippers should be looking out for in 2017.
Disruption in the Industry
The disruptive process starts with the digital transformation. These days the old lines between ecommerce, shipping and supply chains are no longer so distinct. There is a blurring of roles as companies seek synergies and efficiencies. The summer of 2017 is bound to be a time of soul-searching and tremendous transformation within the sector. For quite some time container carriers were able to get away with weak fundamentals that encapsulated escalating costs, inefficiencies, overcapacity, over-investment in fixed assets and declining freight rates. The collapse of Hanjin brought these quirks home and showed that the industry could no longer take its market for granted.
As a consequence of all these changes includes a spate of tonnage rationalization moves so as to reconnect supply to demand. The carriers are cooperating with one another more because they now realize that there is contagion if one of their own fails. For example; they share assets such as carriers and port facilities in order to increase efficiency. At one point 7% of the global fleet was idled and unproductive. Some of these changes will need to crystallize before we can be certain about their long-term impact.
Fleet Growth & Ship size is on the Rise
Another consequence of the changes in the industry is that ships are growing in both size and number. This will change the dynamics of operations in terms of managing overcapacity. It is anticipated that the growth rate in capacity will be about 3.1% in 2017. This is a growth rate that is way higher than anything experienced in 2016 (averaging 1.1%). At the close of last year, the shipping freight rates were beginning to recover but not enough to completely wipe out the historic declines of 2016.
There is a sectoral and regional dimension to these changes. For example; the Asia-Europe spot freight hit a high mark on the 1st of July 2016 below sliding. The Asia-US East Coast spot rate peaked on the 30th of December 2016. It seems the age of industry-wide predictions is coming to a close, in favor of localized statistics. The opening of the Panama Canal has made Panamax container ships redundant. Recently the Rickmers India was the youngest ship (7 years) to ever be sold for scrap. The predicted 3.4% GDP growth must arise in order to allow for the overcapacity to be managed this year. However, the Boston Consulting Group argue that overcapacity is likely to worsen and may even double by 2020.
The election of Donald Trump as President of the United States has had far reaching consequences on all industries. Shipping is no exception. The president has signed two executive orders that significantly change the country’s participation in international free trade. The shipping industry carries 90% of the goods involved in that trade. Specifically; Trump has moved to reduce the trade deficit by targeting those countries with whom the USA has a large trade deficit. There are also controls on shippers who operate with countries that have a history of avoiding fines and taxes. This means that some new shippers may find themselves having to pay an indemnity before being allowed to land on US ports. That could be crippling for small operators, hence allowing the big alliances to dominate even further.
Even more worrying is the uncertainty surrounding the possibility that a Trump Whitehouse might impose a number of tariffs and taxes on countries that used to dominate the shipping industry. Withdrawal from the Trans-Pacific Partnership Agreement as well as the North American Free Trade Agreement was under consideration. The implication that terms must be friendlier to the USA or else the countries will face hostile maneuvers from the administration.
Four large alliances are dominating the industry at the moment including:
- Ocean Three (China Shipping, CMA CGM and United Arab Shipping)
- CKYHE Alliance (COSCO, Evergreen, K-Line, Yang Ming and Hanjin)
- G6 (APL, Hapag-Lloyd, Hyundai MM, MOL, NYK and OOCL)
- 2M (Maersk Line and MSC) in the Asia to Europe service. It is the largest trade lane in the world.
Apart from the 2M alliance, all the others anticipate significant changes over the coming months. From the 1st of April THE Alliance, Ocean Alliance, and 2M had new members. The mergers and acquisitions of 2016 will continue to take shape and influence the industry. Almost 77.2% of all the global container capacity will be taken over by three major players. These same players will take up about 96% of all the East-West trades. The Ocean Alliance alone is able to offer up to 40 loops; closely followed by THE Alliance with 32 services and 2M with 25.
There are also some changes in routines with Ocean Alliance and THE Alliance running 11 weekly Asia-northern Europe routes. 2M is expected to increase its services on the route from 5 to 6. Despite these developments; there is still a lack of timely information for shippers. For example; the Ocean Alliance has not yet fully released its schedules and vessels or transit times. This leads to uncertainty in the industry as a whole.
Some ports are going to fare better than others. Singapore is in line for a boom in business with 34 weekly calls, up from 29. Port Kelang will be a loser with its weekly calls falling from 11 to 5. In any case, shippers should expect significant delays as they go through the paperwork and additional bureaucratic procedures. Working with an experienced freight forwarder who can supply reliable information and communicate with carriers directly will play a critical role.
Push to Go Green
Green is the new black in the shipping environment. There are stringent measures on carbon emissions and costs of environmental degradation. It is anticipated that the International Maritime Organization’s Marine Environment Protection Committee will continue to monitor a number of key green indicators including:
- Fuel consumption
- Sulphur Emissions
- Ballast Water management
Consumers are going to pay more attention to where their goods come from and the journeys that they take. Already innovations are taking place to reduce the environmental footprint of an industry that has not always had a good PR in this area. For example; there are improvements in the design of propeller engines as well as the use of high-tech coatings and air cushions/skysails.
This is a time of change but it is also a time of opportunity. Shippers need to be on the lookout for the fast shifting sands so that they are not surprised by any sudden movements. It is a worrying but also exciting time for the industry.