How To Transform Your Shipping Company

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After a few boom years, the global shipping industry faces a potential downcycle—but increased digitization can help companies prepare for volatility, reports McKinsey & Company.

Players in most shipping subsectors have enjoyed a profitable couple of years. However, industry faces a complex, rapidly changing environment. Macro uncertainties—the threat of recession, geopolitical volatility, crew shortages, escalation of operational costs, and fluctuations in cargo demand—affect all aspects of operations. In addition, there is increased environmental regulation to get to grips with, and much uncertainty around decarbonization pathways.

Crucially, the shipping industry lags behind in digitization, a key enabler for prompt decision making, operational and cost efficiencies, and improved performance. This article introduces a transformation framework to help shipping companies navigate these choppy waters. In particular, it explores how data and analytics can be leveraged to gain competitive advantage and unlock value.

Coming off a supercycle, shipping encounters volatility

Recent years have been a boom time for most shipping sectors—for some, notably containers, the gains have been unprecedented. For one thing, demand has been vigorous, buoyed in the container sector by strong US imports. The invasion of Ukraine and subsequent sanctions have also had an impact, forcing different routings and consequently more ton-miles of bulk and tanker shipping.

This surge in demand came at a time when supply was effectively reduced due to port congestion (resulting from increased volumes) and pandemic-related disruptions of labor and trucking across the supply chain. With demand frequently exceeding supply, shipping rates rose for many vessel types and sizes.

However, these conditions are changing, and the current outlook is volatile. We may be witnessing the start of a new downcycle for industry.

Complex headwinds for all shipping players

This challenging climate is the product of multiple factors. Inflation has been on the rise, leading to less demand for consumer goods. That demand has also shifted back to services, away from the physical goods that powered the lockdown boom.

With the geopolitical turmoil in Europe, ton-miles have been impacted by structural changes in cargo flows, with high uncertainty as to when these would normalize, and what the new normal would be. Meanwhile, slowdowns in Chinese construction are reducing the demand for iron-ore shipments. Tanker trade remains strong, but developments in Russia and Ukraine may yet affect these flows.

Skilled crew sourcing continues to be a significant challenge in the post COVID-19 era, affected by disruption in European labor pools and shortages in Asian pools. Russia and Ukraine are two of the top five source nations for seafarers, and difficulties in sourcing from these countries have compounded an existing scarcity of skilled crew.

Shipping is not on track to meet International Maritime Organization (IMO) CO2 emissions-reduction targets, and the industry is under continuous pressure to decarbonize. Meeting these targets requires a portfolio of levers covering both fleet and fuel—and shipping companies need to work out which ones to pull, in a combination that makes economic sense. Without improvements, many vessels will not be CII (carbon-intensity indicator) compliant by 2030. Specific pathways are still uncertain and expensive, and ship owners face tough choices around retrofitting, buying new vessels, and securing green-fuel bunkering supply.

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Source: McKinsey & Company