Supply Chain Matters provides highlights of the realities of higher number of vessels among global ocean container shipping lines meeting contracting shipping demand levels that are now leading to headcount and schedule reductions.
Background
Ocean container shipping and logistics are the lifeblood of global supply chain movements. The invention of the ocean container as a means for inter-modal sea and surface transportation movements have orchestrated the march toward lowest cost global based sourcing of components and materials.
For the past ten years, Supply Chain Matters has highlighted the cyclical business factors of the global ocean container industry, namely industry competitive cycles of overcapacity in numbers of vessels chasing levels of global shipping demand needs.
In a Supply Chain Matters blog commentary published as far back as March of 2015, we addressed efforts directed at introducing ever larger mega container ships, multi-carrier capacity agreements, outsourcing of certain services and increased transit times and tariff rates compound themselves to secure rate advantages.
We highlighted a Boston Consulting Group Advisory Boston Consulting Group (BCG) at the time that was titled: Battling Overcapacity in Container Shipping. This report concluded: “The container-shipping industry has a highly fragmented value-chain, marked by complexity, overcapacity, and low returns.” The authors declared that overcapacity has fueled a downward spiral of decreased earnings and marginal shareholder value with just two industry players at the time actually making money. BCG advised the industry that in order to lift profitability, carriers will have to extract more value from commonly used cost and revenue-improvement levers and pursue scale by further unlocking synergies and more aggressively pursuing acquisitions.
This BCG advisory further argued that carriers had yet to tap the potential of multi-carrier capacity agreements. The advisory defined further opportunities as extended joint procurement agreements, joint operations and equipment pooling in the short-term, and joint back-offices, shared service centers and IT development over the long-term.
Since that time, quite a lot has occurred.
The industry created the grouping of today’s three prevalent carrier capacity control alliances: 2M, Ocean Alliance, THE Alliance which reportedly collectively control upwards of 80 percent of global container capacity. That in turn, has facilitated more discipline in ocean container freight rates among the globe’s most traversed trade routes from Asia to the markets of developed countries. Some industry critics point to these alliances as creating an oligopoly like market arrangement where industry capacity can be controlled by a few industry players.
Then came the infamous Suez Canal disruption that occurred in March 2021 when the mega container ship Ever Given became grounded in the middle of this vital canal, and resulting in a multi-day closing of shipping traffic. Consequently, shipping schedules, container movements and major ports were collectively snarled for months before shipping lines could return to whatever would be deemed normal operations. This was the same period where the global pandemic had precipitated increased demand for certain products.
The net result was that global wide transportation and logistics costs increased at unprecedented rates during 2021 and 2022. Carriers and logistics services providers experienced billions in windfall profit levels in their ability to leverage the constant disruptions and ship deployment imbalances into skyrocketing spot rates, added services fees, surcharges or demurrage penalties.
By the end of 2021, the World Container Index, published by Drewy Shipping Consultants, a compilation of eight major shipping routes to and from the U.S., Europe and Asia, stood at $9,304 per 40-foot container, a 110 percent increase from the same index at the close of 2020. By the close of 2022, this index stood at $2,120.
Some carriers such as Maersk and MSC have plowed windfall profits into acquisitions and investments in land based logistics services firm in an effort to garner service expansion for combined sea, land, air and last mile fulfillment.
Newest Industry Developments
In early October the European Commission indicated that it would not extend the Consortia Block Exemption Regulation (CBER) scheduled to expire in late April 2024. This regulation essentially provides EU antitrust exemption for existing shipping alliances.
While the alliances would reportedly not be banned by this action, it has added a new uncertainty for carriers. At this juncture, industry watchers indicate that lawyers will be quite busy in the coming months interpreting the implications, if any, of the CBER removal.
In late October, Drewry’s container forecaster predicted upwards of a $15 billion industry dollar loss in 2024 as a result of a forecasted 60 percent reduction in global freight rates in 2023, and an expected 33 percent reduction in 2024. According to Drewry, the forecasted low rates reflect an extreme disconnect between vessel supply and industry shipping demand. While vessel capacity is expected to increase by 6 percent, industry demand levels are estimated to average a mere 2 percent growth in 2024.
Headcount Reductions
Industry bellwether A.P. Moeller Maersk in conjunction with the reporting of Q3 financial performance, announced last week that the company will cut more than 10,000 jobs amid a current surplus of shipping vessels, sharply lower freight rates and contracting levels of shipping demand. Executives indicated that 6,500 positions have already been cut with an additional 3,500 expected over the next eight weeks.
The shipping giant’s Maersk Lines division recently posted a quarterly operating loss. Revenues within the ocean container business unit have reportedly fallen 58 percent on a year-over-year basis.
In an interview with Bloomberg News, Maersk CEO Vincent Clerc indicated that the industry is “probably settling in for a very subdued and pressurized environment for two to three years ahead.” Maersk is anticipating that global container volumes will likely decline 0.5 percent to 2 percent this year compared to a prior forecast of 1 percent to 4 percent contraction.
In its reporting, Bloomberg cited Goldman Sachs analysts warning that the “industry downturn is set to be deeper and longer than the market expects.”
From our lens, that implies that the industry can anticipate additional headcount reduction moves in the weeks to come.
Implications
As industry supply chain and logistics management teams plan their transportation and logistics services budget needs for 2024, there is obvious consideration for these ongoing market dynamics of falling rates and lowered demand levels.
Rates that are currently embedded in prior contracted shipping contracts with carriers and logistics services providers will obviously be reviewed and revisited in the light of existing industry developments. As to what occurred at the beginning of 2023, this is a buyer’s market relative to trading off or balancing market spot rates with negotiated contract volume rates.
As we have also noted in prior commentaries, this remains a period where sailing schedules can be cut back either in scheduling or the occurrence of blank sailings, a practice of cancelling a scheduled shipment because of a lack of break-even freight revenue volume.
Communication among supply chain procurement, planning and logistics teams is thus essential in ensuring that material and customer fulfillment times can be consistently maintained.
Bob Ferrari
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