Our readers who closely follow our global transportation and logistics related commentaries are well aware that Supply Chain Matters has penned our share of rants related to the ocean container shipping industry. For reference, you can review examples of a rant in March of 2013 and a follow-on rant in May of 2013.
Because we are an independent blog, not beholden to industry ties or influence, we felt compelled to offer our point of view to educate industry supply chain teams on the implications and consequences of such strategies. That also compelled us to predict at the beginning of this year, that 2015 would be a turbulent year for global transportation, and indeed, that prediction continues to unfold.
The ongoing strategy of contracting for and introducing ever larger super-sized container ships defies the realities of an industry that has gross overcapacity. Instead, the shipping line dominants, particularly Maersk, are exercising a strategy that in essence, forces other shipping lines to either match such investments or consolidate capacity with other carriers.
Now for those supply chain professionals who do not necessarily subscribe to blog commentary and viewpoints, The Wall Street Journal’s Logistics Report (primary sponsor being UPS, Inc.) has penned its own recent commentary: OECD Says Economic Gains From Big Ships Are Sinking.
The report cites a recent study from the Paris based Organization for Economic Cooperation and Development’s (OECD) International Transport Forum which suggests that the operating cost benefits of megaships to ocean container lines are more than offset by the economic costs on port infrastructure and logistics impacts related to having to load and unload these vessels. A quote from this report indicates:
“The development of the world container fleet over the last decade is completely disconnected from developments in global trade and actual demand.”
The OECD researchers indicated that the new mega container ships allow carriers to benefit from $25 in operating cost savings per container, amounting to $200 million in operating benefits starting in 2017. Meanwhile, the costs for improving ports, re-dredging harbors, expanding transport and logistics networks to accommodate these megaships is estimated to be more than shipping line savings.
The WSJ Logistics report further cites research from McKinsey estimating that a 20 percent gap between shipping capacity and demand will persist until at least 2019.
““The effect of this overcapacity is low freight rates, which will undermine the profitability of the container shipping sector.”
We would add our prior observation that indeed, that is the strategy at-play, eliminate marginal carriers by financial stress and force consolidation among consolidated, multi-carrier capacity networks. The recent U.S. west coast port disruption, although primarily brought about by the effects of labor contract renewal negotiations, was also compounded by the building effects of mega container ships having to be unloaded and re-loaded in just a few days. To gain additional insights on the economics, check out the last paragraph of the recent WSJ Logistics article which cites OECD statements as capacity break-even estimates.
Supply chain teams should therefore not assume that the U.S. west coast port disruption was just a one-time aberration. As more and more megaships enter service over the coming months and years, disruptions are a real possibility if particular ports are not prepared to support the newer mega container ships. Inventory and component sourcing strategies will have to be carefully managed. Nor should transportation teams rest on the current effects of overcapacity leading to cheaper spot container shipping costs. As the marginal shipping carriers succumb or consolidate, the survivors will want to recoup profitability.
Expect a turbulent year in global transportation not only in 2015, but the next three years as well. Perhaps that continues to motivate smaller and mid-market companies to continue to outsource logistics and transportation needs to global-based 3PL’s who have the savvy and expertise to be able to navigate through such troubled waters.