In a prior Supply Chain Matters commentary, we highlighted that for the second month running in August, global production and supply chain activity levels are rising.
This week, both Bloomberg and The Wall Street Journal have published reports indicating that global trade is on the rebound, as manifested by container shipping volumes. The lifting of severe restrictions for both consumers and manufacturers has fostered a rebound in global-wide manufacturing activity as manifested by both July and August PMI reporting.
But unlike the global recession of 2008-2009, global container shipping lines are predominantly making money more than likely at the expense of overall customer service levels, timely movement of goods and much higher transportation costs for global shippers including manufacturer’s and logistics services providers.
Such learning was painfully acquired as economies attempted to recover from global-wide lockdowns in March. Getting a shipment on a vessel was extremely challenging and transit times were excruciatingly slow.
This week, a Wall Street Journal report: Shipping Lines Learn to Make Money By Balancing Supply and Demand (Paid subscription or metered view) indicates that instead of focusing on protecting market share, which occurred during the last global recession, shipping lines have in-essence restricted capacity via blank sailings, and made money doing so.
This report cites 15 senior industry executives polled by the WSJ now expect on-average that the top twelve carriers will collectively make a profit of upwards of $11 billion in 2020.
Global shipping correspondent Costas Paris indicates in the report that when countries initially began locking down their economies to protect populations from COVID-19 spread, global container shipping lines braced for a steep decline in business. Analyst’s warned of massive financial losses across the industry. The report indicates: “Instead, profitability across the business is growing and some operators are reporting their best earnings in years.” Other industry reports note that shipping lines were provided an added cost avoidance as fuel prices plummeted during the initial period of virus-induced lockdowns as global demands for fuel plummeted.
The CEO of industry leading A.P. Moeller Maersk indicated to the Journal:
“We took out 20% of capacity, which saved us costs and boosted utilization rates, mitigating the fall in volumes. We managed our network like UPS and FedEx, adjusting capacity to demand and we continue to do so.”
The report references Shanghai Containerized Freight Index data indicating that the spot-market cost for shipping a container from Shanghai to the U.S. East Coast was $4,200 for the week ending August 28, a five-year high and up $2,562 from the beginning of the year. August further represents the height of the global shipping peak as inventory and goods are in-transit to support the peak holiday buying period that occurs in the final quarter of the year.
Supply Chain Matters Perspectives
We venture to state that supply chain management, procurement and logistics management service provider teams will have different perspectives on this development, more than likely not very positive.
Shipping industry media will continue to praise the actions and discipline of carriers and in retaining the financial integrity of their balance sheets. But, from our lens, the statement from the CEO of industry leader Maersk Lines lacks one rather important perspective.
Parcel carriers like UPS and FedEx are not subject to global-wide regulation that are supposed to ensure adequate service levels are maintained among various global regions. Neither has UPS and FedEx the benefit of global regulators allowing either of such carriers the ability to merge their surface or air transportation fleet assets to service certain regions, or pool transportation assets.
Prior to and during the 2008-2009 global recession, ocean container carriers had little choice but to manage individual capacity levels, while the industry as a whole was recognized for having far too many ships amid global-wide demand. Subsequently, global maritime regulators have allowed the major container lines the ability to form shipping alliance entities to pool shipping assets collectively. Without such a move, we doubt that the industry could have restricted capacity as forcefully that has occurred.
Some in the industry will argue that ocean container carriers have now found a formula to finally maintain sustainable rates. But that argument ignores the industry’s decisions to add massively larger capacity vessels to insure economies of scale. It further ignores the implications among multi-industry supply chains for attempting to manage global-wide inventory shortages under the most disruptive event occurring in many of our memories. Forget the notions of just-in-time inventory flows globally when ocean container was the mode of transport. Notions of waiting days and weeks to secure inventory from a global manufacturer, find an available sailing and factoring the added days or weeks to arrive at port destinations was a common frustration. For some, it was damaging for business.
A final note relates to one of our 2020 Predictions published in January, that called for the technology-enabled disruption of global transportation services processes and further consolidation among transportation and logistics providers. That prediction included ongoing moves by ocean container shipping providers such as Maersk, to vertically integrate into land-based logistics services including last-mile delivery.
COVID-19 has indeed provided added disruption and learning, and one direct learning might well be that ocean container line preferences to favor added profitability over agile customer service levels may well be at-odds with desires for being a one-stop shipping provider. While shipping line investors are pleased, customers of such services would have a different opinion of performance. Air freight or airline carriers would have a positive view as well having gained additional business.
All of such ongoing developments may well accelerate a move toward more regionally clustered or near shored customer demand and supply networks where local logistics and transportation providers benefit.
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