Last week, executives of ocean container industry leader Maersk called a bottom to the container shipping market. Supply Chain Matters submits that the industry is now operating in a changed network model, one that is more closely controlled by carriers. The market forces of supply and demand are now subject to new nuances and declaring a bottom to the market is now a matter of by perspective.
Maersk declared a bottom after observing that shipping demand had outgrown capacity for the second consecutive quarter. In fact, Maersk Line reported that average rates increased 4.4 percent in the first quarter. While, revenues and shipping volumes both increased 10 percent from the year-earlier period, Maersk Line recorded an $80 million loss in the March-ending quarter primarily because of increased fuel costs. That compared to a $155 million loss for Maersk Line in Q4. Maersk executives now anticipate that container demand will increase 4 percent for the full year, with capacity growth at 3.5 percent.
In October of last year, Supply Chain Matters called reader attention to a declaration by Drewry Maritime Research that the global ocean container market had bottomed. At the time, we advised supply chain transportation and logistics teams somewhat cautious on the conclusions that ocean container transportation volumes and rates would bounce back in 2017. That was before we had the opportunity to view the full 2016 ship scrapping rate.
Drewry had qualified its October declaration by stating that pricing would bounce well below the average for 2015. A key unknown for Drewry in October was carrier commercial behavior which was observed as “unpredictable and counterintuitive.”
In early April, we updated teams both on Supply Chain Matters and in our Q1-2017 Quarterly Newsletter noting that reinforcing data reflected a picture of spiking ocean container rates because of capacity shifts. In 2016, ocean container lines scrapped an estimated 3 percent of global tonnage. However, new tonnage in the form of larger capacity, more efficient vessels are forecasted to add an additional 8 percent more capacity this year.
April was also the kickoff of new global routings of the three major shipping alliance networks. The new global alliance networks place more emphasis on scheduling more megaships among the most popular global routes while cutting back on frequency of prior daily or weekly sailings. A belief among industry observers was that shippers and exporters moved-up shipping plans of the April cutover because of the belief that rates would increase significantly.
Calling the bottom to one of the shipping industry’s worst downturns is therefore one of biased perspectives. Container lines themselves are desperately anticipating that global container volumes will positively increase enough to offset new capacity scheduled to come into service this year. Some carriers are also postponing deliveries previously anticipated later this year to next year. At the same time, the scheduling now in-effect under new global alliance networks pools capacity for upwards of 90 percent of major global trade routes. Some lines, such as industry leader Maersk, are weighting port calls to move in and out of owned global port operators to leverage new third-party logistics services, thus competing with existing industry service providers. Thus, some shippers and exporters, such as agricultural commodities may face increased routings and subsequent costs due to different export port routings. Another continuing unknown is whether major ports, such as those spanning the coasts of the United States can effectively unload and load the large container megaships according to carrier’s schedules, especially during peak shipping periods.
The takeaway for industry supply chain, logistics and transportation procurement teams remains one of caution and diligence. Last week, the World Container Index, a composite of container freight rates on 8 major routes to/from the US, Europe, and Asia, was reported as $1557.38 per 40-foot container, up 40 percent from the same period a year ago. Granted, a year ago, rates were hovering below breakeven for carriers, but the market is changing. Shippers reliant on spot market rates are going to feel the impact of dynamic market forces.
Transportation procurement teams will have to do their homework regarding rate trending and shipping alliance contracts. Logistics teams will no doubt be closely monitoring port throughput performance for signs of container bottleneck delays, including the availability of empty containers for export needs.
The industry is now operating in a changed network model, one that is more closely controlled by carriers. The market forces of supply and demand are now subject to new nuances and declaring a bottom to the market is now a matter of by perspective.
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