This is the year in which the recovery of the shipping industry should be kicking in. However, there are still many challenges to be met. In particular, industry experts will be looking at the various trends in order to decide whether or not they will give us a glimpse into the future of the sector. Uncertainty and caution marked 2017, so the industry will be looking for more stability this year. Here are a few trends to look out for:
Company Mergers and Alliances
Throughout 2017, mergers and alliances emerged as the favorite trick for dealing with adversity. The philosophy was that bigger was better. Of course, the economies of scale also helped companies that were struggling to compete on the global scale. Through consolidation, it is hoped that the industry will be able to bring in more viable members. There will also be particular benefits for the companies that consolidate:
- A boost in market share
- Greater efficiencies
- Operational economies of scale
- Better competitiveness, particularly on the global stage
Consolidation will be one of the best ways of overcoming the problem of persistent over-supply within the industry. According to Maria Maslovsky of Moody’s:
“The trend toward consolidation among container shipping firms will continue into 2018 as larger companies look for opportunities to increase market share while smaller companies seek to increase efficiency to maintain profitability.”
Most of this consolidation will take place using slot purchases as well as cooperative arrangements. It is a fast-track pathway to efficiency without incurring additional debt and transactional risks. The companies that will be able to get by without these arrangements include regional specialists such as the Wan Hai Lines. The success of mergers such as the ones that happened with Hapag-Lloyd AG, CSAV, and CMA CGM S.A. and NOL will depend on operational execution.
Major Network Changes
There will be certain network changes as the alliances of 2017 roll out their development plans and strategies. Liner executives will have to think creatively in order to manage any additional capacities without making significant losses. There has a been a flood of tonnage following last year’s mergers.
The most affected sectors include the Ocean Alliance, which is expected to have a 60% increase in fleet numbers. This is the year when there are likely to have over 100 mega ships delivered, leading to a 100% increase in operational ships. About 78 of these ships will have in excess of 10,000 TEU, meaning that another 1.2 TEU is about to be offloaded onto the market. That means an increase in net capacity of up to 7.1%. Current indicators are that the following alliances have stable development plans:
- THE Alliance, 2M (Maersk, Mediterranean Shipping Co. plus HMM)
- Ocean Alliance (Cosco Shipping, CMA CGM, OOCL, and Evergreen)
- 2M and THE Alliance
Some of the initiatives that they have in mind include a phased-in delivery schedule, augmented service provision, and cost controls through the deployment of mega vessels. The Ocean Alliance is at risk because of its drastically changed structure and increased fleet. This is in addition to the anticipated Cosco Shipping-OOCL takeover.
THE Alliance may also face challenges with its new service offering that is expected to kick in around April 2018. This is when the Ocean Network Express (ONE) will become operational. The triparty combination of Hapag-Lloyd, ONE, and Yang Ming will be able to deliver 33 services across 81 ports.
Top Carriers Consolidating Control
As part of the capacity management element of the trends, top carriers will be expected to consolidate control, hence squeezing the regional specialist providers. The trend of an inverted pyramid industry structure is one of the key expected trends.
According to George Knowler at Joc.com, by the end of April 2018, it is expected that “OOCL will become part of Cosco Shipping, and the three Japanese lines will begin operating their container divisions together under Ocean Network Express. The implication is that the top seven carriers will have a market share of 80%.” This trend started as far back as October 2017 when, out of the 379 vessel operations, only 31 had more than 0.1% of the market share. According to Drewry, “The industry is heading towards a scenario whereby a small handful of dominant carriers dictate matters, but there is still healthy competition in most trades for now…”
The top 15 carriers will have over 80% of the market. At the beginning of this year, this group had an operational capacity of 18.32 million TEU. The Maersk Group, for example, has been able to grow its operating capacity by 26.8% and currently holds up to 1.8 million TEU. This marginalization of the smaller carriers was summarized by SeaIntel as follows:
“The larger carriers are expanding their fleets rapidly–and with a larger fleet comes the ability to design an ever-more granular network. A more granular network will increasingly be a competitive threat to niche carriers from a product design perspective.”
Artificial Intelligence (AI) and Digitized Workers
There will be an increased use of artificial intelligence (AI) and digitized workers in order to bring profitability and efficiency to the industry. This may mean that carriers will be given an easy option of getting alternative ports depending on the information on the ground. That means increased accuracy in the ETAs as well as more predictable cancellations and rolled bookings.
Transparency in the Supply Chain
Shipping industry players are likely to encounter more scrutiny about their ethics, particularly in the area of environmental protection in 2018. There will be increased scrutiny over corporate supply chains and whether they adhere to the value expectations of clients. Customers will vote with their feet if any industry player is unable to fit in with their value systems. Many eyes will be on China as the shipping powerhouse of the future. But, it is also one that has not always had a good record on these issues.
It is anticipated that freight rates will rise, but others are less optimistic, citing the potential for over-capacity. According to April Zobel of the Lansing Trade Group, managed capacity might drive up rates. This is based on the assumption that the shipping companies will be able to control any over-capacity that arises.
It is expected that international relations between the US and China will largely drive the trends in the shipping industry. There is potential for retaliatory protectionist policies that reduce the number of goods shipped across the two economic powerhouses.
Next Steps for Shippers
The key to success for 2018 is to be aware of the trends so that shippers can plan ahead. Many of the mishaps that happened in 2017 were mainly due to the failure to plan adequately for all possibilities. This is something that all players in the industry must watch out for.