This week, noted maritime and shipping industry research firm Drewry Maritime Research declared that the ocean container shipping market has now bottomed out. The recent ongoing Hanjin Shipping bankruptcy and receivership development is noted as representing the trough of the container shipping market and that a gradual market recovery is now expected.
While Supply Chain Matters has great respect for Drewry’s knowledge and research related to the maritime industry, we advise our readers to be somewhat cautious on the conclusions that ocean container transportation volumes and rates will bounce back in 2017.
The firm’s latest research predicts that ocean container shipping lines will record a record $5 billion in operating losses for this year, with industry profitability to recover to a modest $2.5 billion by next year. An important caveat is described as follows:
“However, this anticipated recovery needs to be put into perspective. While average freight rates are expected to improve next year, this will follow several years of negative returns and will still leave pricing well below the average for 2015. A key unknown remains carrier commercial behaviour which has proven unpredictable and counterintuitive. Hanjin’s demise may mark a watershed in this regard, but liner complacency on the risks of insolvency may challenge this notion.”
Obviously the noted caveat should have important meaning for multi-industry shippers and transportation procurement teams since this industry has yet to flush out upwards of 30 percent of excess ship capacity. The industry further must undergo a period of either consolidation via acquisitions or in the acceleration of scrapping older, less efficient vessels.
From our lens, the real caution for shippers to ascertain is whether the largest shipping lines garner much more industry influence through aggressive acquisition of other marginal lines and/or global shipping routes. Drewry’s stated viewpoint is: “Those carriers who can weather the prolonged storm have a chance of emerging the strongest in 2019/20.” That represents a 3-4-year window, a considerable time interval in the dynamic nature of global transportation volumes. Drewry acknowledges that industry players are more focused on maintaining or protecting market share and operating volumes at the expense of contract negotiations.
The other important unknown is how much global based maritime regulators will tolerate for major carriers garnering too much global market share. Up to this point, our impression has been that regulators have taken an industry-friendly perspective, allowing for the continued existence of major shipping line global alliances that pool shipping capacity and global shipping route scheduling. At some point in the not too distant future, geographic based regulators will be forced into determining when multi-industry shipping interests within a specific region will be significantly harmed by consolidation or carrier consolidation events. The ongoing example of Hanjin by our lens, reflects Korean maritime regulators favoring the interests of bankers and financial institutions that now longer could afford to support added debt to Korea’s shipping lines and shipping interests. Similarly, European and other geographic regulatory interests will be facing similar dynamics.
Previous indicators have consistently noted that the ongoing ocean container industry overcapacity condition will prolong itself for at least the next two years. Shippers and global transportation procurement teams re therefore wise to not favor long-term contracting or rate locking. A lot more can and probably will happen in the months to come.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.