2020 Ocean Cargo Roundtable: Crisis Cycle Collaboration

Shipper/carrier collaboration has never been more crucial for an industry under pressure from the pandemic, ongoing international trade tensions and general, global economic disruption. This year, our maritime experts send out a call for more transparency and ongoing communication between both parties as we—a collective whole—look to kick start the world’s commerce.

Joining us in our 2020 Ocean Cargo Roundtable are Philip Damas, head of Drewry’s Supply Chain Advisors; Paul Bingham, director of transportation freight consulting at IHS Markit; and Dan Smith, principal at The Tioga Group, a freight transportation consultancy.

Logistics Management (LM): Will carriers be able to sustain their rate structures amid a high level of blank sailings and volume declines?

Philip Damas: The short answer is no. The increase in rates, especially in the eastbound Asia-U.S. West Coast trade, was a result of large-scale capacity reductions. Faced with an unprecedented downturn, carriers had little alternative but to remove capacity from the market. In the case of the trans-Pacific, however, carriers clearly overestimated how much capacity needed to come out and removed too much capacity, resulting in “roll overs” and in large increases in spot freight rates for many of their shippers.

Paul Bingham: The liner industry’s track record of maintaining vessel capacity deployment discipline over the long-term has been poor in the last decade. However, the industry proved they could exercise discipline coming out of the Great Recession in 2010 that led to the highest overall rates for any year in the decade. During this recession, the container carriers are proactively adjusting capacity week to week through blanked sailings and some vessel lay-ups to sustain their rate structures in the face of the overall decline in trade volumes.

Dan Smith: I agree with Paul. Low demand and low utilization always equals low rates. Even with those vessels laid up in shipyards for installation of new engine exhaust scrubbers, it will likely take a long time to work off the vessel capacity supply and demand imbalance through vessel retirements and the offsetting pressure from newly-built vessels still being added to the global fleet. The container operators recently have been more restrained in placing additional vessel orders, and this has resulted in a declining backlog in the shipyards’ orderbooks as new vessels are completed.

LM: How likely will carriers return to “slow steaming” to reduce costs?

Bingham: With bunker fuel relatively inexpensive relative to ISO-2020 expectations for low sulfur fuel costs this year, slow steaming is attractive for a key reason other than the direct reduction in fuel costs. That’s because slow steaming also helps absorb some of the excess capacity in the global vessel fleet by requiring more total vessel capacity in total to move the same volumes over the same network of routes in a given amount of time. Slow steaming also helps with vessel emissions performance by carriers, a factor important to some customers and to governments still pursuing carbon footprint reductions as part of climate change initiatives.

Damas: Paul makes a good point, but Drewry feels that, with the recent fall in bunker prices, “slow steaming” becomes a less effective method for carriers to reduce their costs, so we don’t see this as a trend for now.

LM: Do you see more construction of “mega-vessels” in the future?

Damas: Drewry believes that container vessels have reached a maximum size—about 25,000 twenty-foot equivalent units (TEU), which means that the race among carriers to build larger and larger vessels mainly to secure economies of scale has finally stopped. However, carriers will also resume ordering what we call ultra large container vessels (ULCVs), or ships with capacities of more than 18,000 TEU to support trade growth, but at a lower level than in recent years.

Bingham: Indeed, there will be construction of additional mega-vessels in the future for deployment for those trades, such as Asia-Europe, where the large volume density makes the economies of scale for those ships compelling. The previous generation of mega-vessels deployed heavily now on the Asia-Europe trade lane will eventually be cascaded into other trades.

Smith: Yes, but it’s part of the problem and not part of the solution. Just because the marine architects can design vessels and shipyards can build ships much larger than today’s largest mega-ships, ever-larger vessels increasingly run up against economic costs on the land side—diseconomies of scale—that act to limit their financial viability in much greater numbers.

LM: Are there any carriers today that are insolvent or vulnerable to a takeover?

Damas: Some of the carriers have very weak, over-leveraged balance sheets as they enter the current recession, but unless the COVID-19 crisis results in a second wave or a longer economic downturn, we don’t expect a major carrier bankruptcy like Hanjin’s in 2016.

Bingham: The carriers with sovereign ownership or implicit national state support are most likely to survive difficult financial conditions. During the Great Recession, no global container carrier was liquidated or allowed to fail. That was the consequence of financial sector and national government support for specific carriers, so the precedent in the liner industry is that deep recessionary economic conditions do not necessarily lead to insolvency.

Smith: While Tioga has not followed this issue closely, we observe that takeovers among the remaining operators are possible, but may be difficult right now with current debt market conditions worldwide.

LM: What about consolidation? Will that trend continue?

Smith: Yes, but in fits and starts. However, this strategy is only part of the solution if the consolidated carrier rationalizes capacity.

Bingham: The slow, decades-long consolidation trend is not likely at its end from a long-term perspective. The attraction of economies of scale operationally and for marketing, branding, and administrative perspectives is still there within the liner industry, yet immediate conditions aren’t favorable toward further consolidation in the near-term.

There are remaining industry competitiveness concerns expressed by shippers and regulators in some countries that also act as an impedance to further consolidation, where concessions that further combined operations may need to grant regulators to act to reduce attractiveness of further consolidation.

Damas: I’ll just add that there are few takeover targets left, and a merger among Taiwanese carriers currently seems like a possibility.

LM: We’re seeing a steady decline of inbound vessel calls to West Coast ports. What’s driving this carrier trend—and will it continue?

Damas: West Coast ports are seeing a large fall in vessel traffic for many reasons, including the U.S.-China trade war, the COVID-19 crisis, the long-term shift of market share to the East Coast ports, some near-shoring of production from China to Mexico and the current policy of carriers to blank sailings. As carriers reduce the number of cancellations, the number of vessels will recover from its current lows, but we expect that the cargo will take at least three years to go back to 2019 levels—and some of it just will not come back.

Smith: We expect to see fewer inbound vessel calls to the West Coast, but with more mega-ship participation that will offset the volume.

Bingham: The drop in vessel calls has been a result of a number of factors, but in 2020 it has been primarily the blanked sailings by carriers trying to sustain shipping rates. Carriers are trying to match deployed capacity to bookings week to week.

Carriers, through their alliances, have been able to hold rates higher than might have been expected given the overall drop in international trade volume with the pandemic-driven recession. This pattern will likely continue in some form going forward, although blanked sailings at some stage become effectively just reduced services offered on the trades and shipper expectations will adjust to match.

LM: Do you expect carriers to differentiate their services to meet the unpredictable demand cycles of the pandemic?

Smith: No. There is very, very little difference between carriers, which is one reason why they can’t sustain higher rates. Moreover, alliances tend to erase carrier differences.

Bingham: When operating as part of the alliances, it is difficult for any one carrier to differentiate their services fundamentally in terms of ports of call, service speed or service reliability. Individual carriers can attempt to compete on factors under their control that can affect shipper choice such as free time, detention and demurrage charges, operational options such as storage-in-transit, and better integration with information service intermediaries who can help improve visibility for shipments, all helping shippers cope with unpredictable demand cycles.

LM: The closure of international borders and quarantines of entire countries is something new. What is the impact on the ocean cargo sector?

Bingham: Operations of ocean cargo terminals have been little affected, as those were mostly very quickly identified as essential services and where protocols to protect the workforce were adopted rapidly. There has been some loss of productivity in the terminals and with dray trucking and rail connectivity due to the extra precautions that workers must take.

On the vessel operations side, inherent social distancing and the duration of ocean voyages is sufficient to protect most vessel crews from virus spread if they don’t go ashore and the harbor pilots or new crew members don’t carry the virus aboard in port. Apart from the sharp changes in underlying commodity volume demand for ocean shipping, the border closures and quarantines have most affected the mobility of the ocean cargo workforce.

LM: Finally, what advice do you have for logistics managers who are seeking to mitigate risk during the disruptive era?

Damas: We all know that more companies are looking at their sourcing policies to avoid being fully dependent on China-based suppliers. This will be an important trend to mitigate sourcing risks, but it will take time.

For the next few months, all that logistics managers can do to mitigate the risk of late deliveries is to talk to their logistics providers to anticipate and work around capacity shortages, transport operational problems and equipment shortages and react quickly, even by using more expensive transportation modes when necessary. This calls for sharing shipment volume forecasts, ship capacity and equipment pool forecasts and the like between shippers and carriers.

Bingham: Better visibility of shipments becomes more important to be able to minimize disruptions as conditions change country-to-country. Comprehensive country risk management information is available for managers to include in monitoring conditions in relevant markets.

Going forward, logistic managers will benefit from reassessing their supply chain sourcing and distribution networks, including tier suppliers and key network links and nodes. Also an understanding of changing conditions affecting customers is valuable to be able to mitigate against risks from changes in demand.

Smith: All eras are disruptive—it’s only a question of which disruption and when. There’s no normal, there never has been a normal, and there never will be a normal. Logistics managers have to constantly balance safety and cost because carrying more inventory, diversifying sources and carriers, or ordering earlier all cost money.

The key advice to both shipper and carriers is to not get too greedy when you have the upper hand—your counterparts will remember when you are on the downside of the next disruption