IHS Markit economist shares views on state of global ocean cargo industry: Part I

Editor's Note: Paul Bingham, Director of Transportation Freight Consulting at IHS Markit, always provides our readers with remarkable insights on the state of ocean carrier industry. In this three-part interview, he covers a wide range of issues.

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

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 they industry proved they could exercise discipline coming out of the Great Recession in 2010 which 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.  

LM: How long will this behavior persist?

Bingham: There remains a fundamental supply/demand imbalance between total vessel fleet capacity and demand, that carriers only partially overcome through blanked sailings, slow steaming and the vessel lay-ups we’re seeing now.  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 / 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, resulting 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: Even with bunker fuel relatively inexpensive relative to ISO2020 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 is 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.

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

Bingham: 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.  Most commonly into the transpacific as well as with more pendulum services, the transatlantic trade, as the new largest 20,000-24,000 TEU mega-vessels increase their share of the Asia Europe trade. 

LM: Will this trend continue?

Bingham: The long-term trend has limits however where there will not be truly ever-larger vessels for decades to come.  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 other complications?

Bingham: Yes, and that’s a good question. The land-side operational impacts of loading and unloading the huge volumes of cargo on much-larger vessels along with the inflexibility in terms of the number of ports they can call fully laden slows the trend towards ever-larger mega-vessels.  Insurance costs in the event of vessel casualty also are a factor due to the concentration of financial risk for insurers calculating premiums to charge operators of such ultra-large ships.  

Tomorrow: Part II