The shipping industry is almost always in a state of flux, with frequent and sweeping changes. The challenges and opportunities of 2016 have led to very specific changes in key areas:
- Hanjin collapse: One of the major service providers applied for bankruptcy in light of overcapacity and intense competition. This proved to be a cathartic and traumatic event for the industry since Hanjin was previously perceived to be an industry leader.
- Falling freight rates: In an effort to attract more demand and accept the realities of a changed global economy, freight rates were drastically reduced. This meant that key players in the shipping industry have to come up with creative ways for keeping the bottom-line steady.
- New alliance formations: One of the responses to the crises within the industry was to form strategic alliances as a means of sharing expertise and markets. The future of the industry seems to be gearing towards this particular type of industry model.
The New Year brings new challenges and opportunities. That is why it is imperative for shippers to be very aware of what is happening in the industry in terms of trends and potential risks. The biggest emerging challenge is the management of capacity, demand and supply. According to industry analyst Stifel Nicolaus; non-compensatory rates are no longer acceptable. Therefore, it is anticipated that there will be a pricing trough in 2017. Accordingly;
“carriers grappled with persistently weak spot market pricing and contract customers who abandoned talk of collaboration and reverted to aggressive, Neanderthal style pricing tactics”.
The results will be price increases that range anywhere from 3% to 4%; whereas in 2016 the price inflations hovered around 2%.
1. Increased Consolidation
This has become an important tactic for most industry players and it is bound to continue in 2017. The impact on the market is to squeeze the space for small players. However, there will still be some room for these individual shippers to create new business opportunities. For purposes of illustration, one need not look further than Maersk Line’s purchase of Hamburg Sud. Given the $5-10 billion losses that arose in 2016, it is likely that the consolidation moves will lead to bankruptcies, acquisitions, and mergers.
A recent survey of industry observers indicated that up to 77% anticipated an increase in consolidation for 2017. The structure of the industry will change drastically with only 14 major global carriers expected to make it through to 2018. That means that 7 major players will control 65% of the entire world capacity.
2. U.S. China Trade Relations
The new U.S. presidential administration and the forthcoming Brexit movement are likely to affect US-China trade relations. Because these two economic giants are the bedrock of international trade, the shipping industry will not be spared the aftermath. The new U.S. administration, in particular, prefers a protectionist stance that could lead to trade wars. Others like Nariman Behravesh of IHS Markit; hope that Trump will eventually pursue a pragmatic economic policy which focuses on growth.
In any case, global GDP might achieve a modest growth rate of 2.8%. As Europe struggles with the threat of populist movements, the US might emerge as the remaining reliable trading partner for China. Hence, it is expected that routes to the US will remain very popular.
3. Labor and Unions
The labor unions are watching the developments with interest and are likely to react in order to protect their own existence. A case in point are the two large shipping labor unions in the US (International Longshore and Warehouse Union) which want to renegotiate contracts in 2017, taking into account the looming threat of corporate bankruptcy. There are also indicators that the International Longshoremen’s Association will follow suit on the East Coast. The ILWU and the Pacific Maritime Association will be negotiating their current contract which is due for review in 2019.
If these industrial relations escalate into conflict, there could be a significant disruption to service delivery. We only have to look back to the West Coast dispute of 2014/2015 to realize the potential damage to the industry as a whole. US dockworker unions are gearing up for more aggressive stances towards employers. The key points of contention may include health, safety, and insurance as well as the threat of automated container terminals which necessarily take away jobs from human workers.
4. Uncertain Pricing
The base rates for the industry are bound to be volatile given the large number of consolidations. In any case, the demand for higher rates in 2017 is logical given the evidence of bankruptcy that was provided by the likes of Hanjin. There is a mismatch between capacity and traffic. For example, between 2008 and 2016; capacity growth outstripped traffic by 5%. This is one of the reasons why Hanjin met a sticky end. The fleet growth of 1.1% in 2016 was lower than demand growth; setting the stage for imbalances in 2017. There will inevitably be some regional quirks such as the increase in spot rates for Asia-Europe routes. It is anticipated that contract rates on different trades will increase. A recent survey of shippers showed that 46% were preparing for increments in the trans-Pacific contract rates.
5. Increased Number of Alliances
Not only will new alliances be formed; they could also face significant adjustments to account for market dynamics. The use of vessel-sharing agreements will fundamentally change the way in which the industry is run. Some of the great alliances anticipated include the Transport High Efficiency, Ocean and the 2M Alliance + HMM group. That automatically means changes in vessel rotations as well as terminal locations. Some shippers have expressed concern that some of the changes will cause significant organizational and logistical challenges. According to a recent survey, up to 47% of shippers anticipate these disruptions.
Shippers who want to remain relevant and to maintain their competitiveness have no choice but to keep up with the trends. It is imperative to read industry reports and get real-time information on all the mergers, acquisitions and prices changes. As for the political ramifications of populist movements in Europe and the US; the jury is still out.