There is little question that 2016 will go down as the most transformational year in container shipping since the Ideal X sailed out of Newark in 1956, ushering in the era of the container. Never before has the industry witnessed a series of mergers, acquisitions, failures, and restructurings at the pace and scale it’s seen over the last year. “The liner shipping industry is undergoing the most dramatic restructuring in its history,” World Shipping Council President and CEO John Butler says in a commentary submitted for the 2017 Journal of Commerce Annual Review and Outlook.
But after the dust has settled, as it inevitably will, and probably in short order, what will the shipper face in 2017 and beyond? Has the industry transformed in a way that will accrue to the benefit of the customer? Or, as has been the case over the past several years, were carrier decisions to merge, acquire, or restructure (Hanjin didn’t decide to fail) akin to the decisions to build mega-ships or slow steam their vessels, that is, primarily for their own benefit, with little regard for the needs of the customer? Is there any chance of value creation extending to the customer?
In the near term, the answer has to be no. As part of the process of consolidation, carriers are withdrawing capacity. The Maersk-Hamburg Sud, CMA CGM-NOL, Hapag-Lloyd-UASC, and NYK-MOL-“K” Line deals “all point to a rationalization of capacity,” Deputy Seaspan Chairman Peter Shaerf says. As charters come to an end, owners are finding they have few profitable options to recharter the ships, even very new ones. Case in point: The youngest-ever ship to be scrapped, the 7-year-old Rickmers India, was sold in December for less than $6 million, having been purchased new for $60 million in 2009, according to IHS Markit Data. The average age of container ships sent to scrap yards is declining. “I expect that we will see continued high levels of both scrapping and idling,” Maersk Group CEO Soren Skou said in November, according to the earnings call transcript posted by Seeking Alpha.
In addition to capacity coming out, the restructuring of vessel-sharing agreements — that is, the Ocean and THE alliances’ rolling out in the first half of 2017 — will be chaotic for shippers, a fact the 2M partners of Maersk and Mediterranean Shipping Co. have been more than happy to point out to customers. “Many shippers express concern, and with good reason, as the supremacy of the giant alliances may come at the expense of shippers,” Zim USA President George Goldman writes in the Annual Review and Outlook. Zim isn’t a member of an east-west alliance.
Others are also skeptical. “Moving from 18 ocean carriers to 10, further consolidated into just three alliances, means larger ships, less competition operationally, fewer sailings for exporters to select from, and more stress on terminals and labor,” Peter Friedmann, executive director of the Agriculture and Commodities Transportation Coalition, says.
“In this new, unsettled operating environment, many questions arise, such as how difficult it will be to phase vessels in and out of existing networks, and what the impact will be on current transit times, port calls and vessel space,” writes Klaus Schnede, manager for North American Marine at Eastman Chemical.
In the longer term, however, things could play out more favorably for shippers. Will fewer, stronger carriers be able to make the investments that create value for customers? An early test will be the newly created transportation business of Maersk Group, where terminals, logistics, and liner businesses are being combined into a new, digitally driven entity that envisions a customer experience akin to that of UPS or FedEx. But while the Maersk game plan is ambitious and forwarding-thinking, it remains to be seen whether such an approach can break the commodity cycle and set up a scenario where the value is created for the customer, which then is willing to allow the provider to share in the spoils.
In its capital markets day on Dec. 13, Maersk spoke of cost synergies coming from the integration of its transportation businesses and the need to maintain cost leadership and a “lowest cost, lower every year” culture. But it also discussed how digitalization and improving the customer experience will be core to its objectives, improving in areas such as track and trace, instant quotes and booking confirmation and online documentation. These are all services that, at least as provided by carriers, are hopelessly antiquated; if Maersk can drive real change and quickly, it has an opportunity to differentiate itself.
Other carriers, including some of the newly and soon-to-be consolidated entities, won’t be far behind. Customers will benefit from these innovations, but, ultimately, is it enough? What customers truly value is reliability, and that can’t be digitized. For that to be achieved, the fundamental carrier-customer relationship has to change. Cosco Shipping (North America) President Feng Bo is right when he says, “Shippers and carriers should have serious discussions about how they contract and agree to rates and contract terms that are fair and keep disasters at bay.”
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Source: JOC
