What can be done to save the Ocean Shipping Industry?

Post-2010 through 2012 ocean freight rates were at an all-time high (Petersen, 2016). However, now there have been massive drops in ocean freight prices to historical lows, and the predictions are not good for the end of 2017 going into 2018. In fact, many experts believe that this trend will be very difficult to reverse barring a worldwide economic miracle related to logistics (Glave, Joerss, & Saxon, 2017). The fact is that, while these rates have been excellent for customers, they have caused many freight lines to operate at a loss (Glave et al, 2017; Petersen, 2016). These companies continuing to operate at a loss will eventually lead to there not being enough shipping lines and vessels to meet demand, thus driving the cost up far beyond what was seen in years past (Vineyard, 2017).

The Causes of the Rate Collapse

While there are those that choose to blame one or two underlying causes for the recent damage done to this industry as a whole, the fact remains that the answer to the cause is not simple. There are a number of reasons that ocean rates have plummeted in recent years (Burnson, 2015).

Market Saturation

To put it simply, many carriers decided that creating the largest vessels that they could be an excellent idea in the years 2012-2014, which ocean shipping costs were at an all-time high (Petersen, 2016). It takes between two and four years to build and outfit one of these vessels, averaging out to three years apiece. The result is that every shipping line built the largest possible vessels, completing their construction around the same time. This resulted in their being too many ships in the world, and not enough cargo to put on them (Phillips, 2016). This degree of market saturation has caused supply to far exceed demand, resulting in an almost mandatory drop in rates.

Lower Fuel Costs

Fuel costs dropped from very high levels in 2012, with July average cost per gallon being $3.60 in most areas (Hargreaves, 2012). However, when prices dropped from $147 a barrel to less than $35 a barrel that following December, prices began to drop, and did so steadily right up through 2016 (Vineyard, 2017). This drop in cost mean that customers did not want to pay more than necessary for ocean shipments as the fuel surcharge dropped. A lower cost in fuel drives down expected prices, and consumers will work to avoid what they consider prices that are higher than expected (Low rates on, 2015).

Rate Wars

A direct tie-in with the unwillingness for consumers to pay more than they feel is necessary has to do with the rate wars that ensued related to ocean freight shipments. As a number of shipping companies finished their larger vessels’ construction at the same time, in order to pay for the costs that were absorbed, the companies had to compete on rates with other organizations (Burnson, 2015; Glave et al, 2017; Vineyard, 2017). This cyclical battle of attempting to undercut the competition caused a rapid drop in ocean freight prices. The end result of this is that many of the ocean liners began to offer rates that were lower than the cost of operation, solely to have some income coming into makeup for the massive cost of ship creation (Burnson, 2015; Petersen, 2016).

Closure of Chinese Factories

China has dominated the need for ocean shipments in recent years, being the world’s largest importer of iron and one of the largest exporters of finished goods (Knowler, 2017). However, tighter environmental protection laws put into place in China have resulted in massive drops in the number of factories that are present, both those that smelt iron and those that convert smelted iron into useable goods (Knowler, 2017). These factory closures have caused the need for ocean shipments to plummet, further increasing the supply of vessel space over the demand which it was designed to fill.

The Possibility of Salvaging the Ocean Industry

While numbers continue to fall for the ocean shipping industry, all hope may not be lost. There are steps that may be taken to ensure that the industry is able to again become profitable, and by doing so ensure that prices remain reasonable for the consumers that utilize these methods of transportation.

Increase in Fuel Prices

As fuel prices increase, the companies that operate ocean shipping lines will be able to increase their prices to

Scrapping and Salvaging

One solution that a number of shipping lines have pursued is to scrap some of their vessels earlier than originally anticipated (Vineyard, 2016). This makes some sense, as the reduction of vessels will decrease the overall market saturation, and over time, will result in an increase in demand. However, this is not always the most cost-effective approach, as the value obtained for scrapping a vessel is worth very little compared to what it was worth, especially if it was built in more recent years. Contrary to this point, the scrap value may be worth more when time value of money is considered when the costs of canceled shipments, insuring vessels, storing vessels in dry dock, and shipping partial loads. This is a point that is heavily contested, as an average of 450,000 ships may be scrapped a year, which is barely a dent in the 20 million that are in active service at this time (Vineyard, 2016). This might be a long-term solution but is likely to do little in the short term.

Massive Mergers and Acquisitions

The series of events that are most likely to bring about the positive change that the ocean shipping industry needs are a number of mergers and acquisitions that are taking place amongst the world’s largest ocean freight shipping lines (Wright, 2017). These mergers will see the major alliances 2M, Ocean Alliance, and The Alliance divided and recombined in a manner that allows these three alliances to control nearly 96 percent of the ocean freight that will move throughout the world. This will allow for more balanced pricing, as these three alliances will be able to offer different lanes of service and set a fair rate per TEU to be shipped (Wright, 2017). This combination of mergers and acquisitions is to be completed in 2018, at which point experts do predict that the downward trend that the ocean shippers are experiencing will stabilize and level off. Once this occurs, then as fuel prices increase, market saturation decreases and demand rises, ocean rates are expected to become profitable once again.

Conclusion

While there are a large number of reasons that the ocean shipping industry has suffered heavy losses over the past five years, the evidence demonstrates that there are steps that can be taken to ensure that this turns around. Ensuring that ocean shipping becomes profitable again is the easiest way to ensure that many of these companies do not cease to exist, causing there to be a massive spike in price as demand far exceeds supply. Taking small steps, ensuring balancing the costs of shipments, and exploring more in-depth analytics may save the ocean shipping industry from the predicament in which it has placed itself.

 

Contributor: Stephen Hull

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About Allyn International

Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance.  Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China and Prague, Czech Republic. For more information, visit www.allynintl.com.
 

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References

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