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A. General overview and review of the Container Shipping industry in 2023

As we step into 2024, it would be worthwhile to briefly review how 2023 was for the shipping and logistics industry in order to understand the underlying context, which in turn will facilitate a better appreciation of the trends and factors that are expected to influence the maritime industry in 2024 (and beyond).

In 2023, while the shipping industry in general witnessed a gradual return to pre-Covid levels, the year was uncharacteristic in many ways.

Freight rates across most trade lanes continued their steady descent to the historical average, while port congestion and other transport bottlenecks that had driven the post-COVID disruptions in 2021 and 2022 largely dissipated, greatly easing the pressure off global supply chains.

The resultant freeing up of shipping capacity and equipment, in conjunction with the infusion of new tonnage (which had been ordered in large quantities by cash-rich Carriers during the Covid-fuelled boom), led to an excess supply situation, which further drove down freight rates.

The recessionary pressures afflicting most countries and subsequent tempering of consumer sentiment had the effect of moderating demand for shipping services (as shipping is derived demand, dependent on the demand for consumer and industrial goods and raw materials).

As a consequence of these factors, the balance of power started shifting slowly in favour of shippers and exporters, first manifested in the drop in spot market rates and later in contractual rates (as and when they came up for renewal, where new contract rates were negotiated using existing spot rates as a guideline).

And amidst all this, the Russia-Ukraine conflict had ramifications spreading far beyond the region, while concerted endeavours to mitigate risks arising from reliance on a single sourcing centre, as well as the desire to diversify procurement origins and shorten supply chains, caused a realignment of trade patterns.

Attempts by various governments to increase economic cooperation with politically and ideologically alike countries to strengthen bilateral relations and make supply chains more reliable and robust (referred to as “Friendshoring”) provided further impetus to the trend of shifting manufacturing capacity and investments, thus creating new markets and manufacturing/ procurement centres.

Attacks on commercial vessels indicate a widening of the theatre of conflict, with more nations and players getting involved, greatly adding to the level of risk for vessels plying on this route. The overall uncertainty has had a debilitating impact on shipping services, compelling Carriers to sail around the Cape of Good Hope, which is a longer and more expensive route.

The combination of longer sailing distances, lengthier transit times, higher bunker consumption, increased insurance premiums, risk allowances for the crew, etc., have all caused a spike in freight rates, which will inevitably have an inflationary effect on consumer prices in most countries.

Natural factors, too, played their part, with atypical climatic variations impacting major waterways, from the Panama Canal to the Great Lakes in the US to the Rhine River in Germany. Poor rainfall and/ or drought in these areas led to a drop in water levels, resulting in the imposition of limitations on draught and the weight that vessels sailing across these waterways could carry.

At the Panama Canal, historically low water levels compelled the Panama Canal Authority to reduce the daily limit of the number of vessels that can cross the Canal, while the low water levels, by default, implied a curtailment in the cargo that vessels could carry. Low water levels on the Rhine impacted barge movement at various points in time throughout 2023, which in turn put pressure on other modes of transport such as road and rail.

Given the diverse nature, scale, and geographical spread of all these factors, the impact of which was magnified manifold when occurring in conjunction (such as the Panama Canal and Suez Canal both being blocked at the same time would leave Carriers and shippers reliant on routing options that are far longer and involve considerably higher costs), the non-controllable element of the shipping business became more complicated.

Since most of these factors are essentially natural phenomena or require political solutions – thus being outside the control of Carriers and Exporters – there is considerable uncertainty regarding their resolution and impact as we move into 2024. Further, with the complex macroeconomic and geopolitical factors at play, the operating environment is quite volatile.

Under these circumstances, there are some prominent factors that will materially impact the Container Shipping industry in 2024, the nature and impact of which we will understand in this article.

B. Trends and Factors impacting the Container Shipping industry in 2024

1. Supply-demand balance and a massive influx of additional capacity in the market

Perhaps the most common concern in the container shipping industry has been the massive influx of new capacity that is expected to inundate the market in 2024 (and 2025 as well).

As Carriers grappled with a paucity of capacity to meet the unexpected increase in demand in the second half of 2020 but still made record profits due to record-high freight rate levels, a proportion of the windfall revenues were utilised for placing orders for new vessels.

The ordering spree led to a record orderbook (measured as a proportion of existing capacity, the orders placed post-COVID ranked second only to the pre-recession period in 2008-09, when the global economy was booming and demand for shipping services was high).

The extent of over-ordering can be gauged from the fact that the capacity of the new vessels ordered is equivalent to 27% of the global fleet, which in October 2020 stood at 8%.

What poses even more challenges for Carriers is the fact that the timing of the delivery of these vessels will coincide with a marked drop in demand, with estimates for global demand ranging between 3% to 4% for both 2024 and 2025.

To make matters worse, a large proportion of the newbuilds comprise mega-vessels, which by virtue of their size are subject to the operational and infrastructure limitations at maritime ports, thus restricting the number of ports that they can call at and, by extension, the number of trades that they can be deployed on.

While cascading vessels to secondary and tertiary trades is an option that Carriers can resort to, there is a limit to the extent that this tactic can be employed, given the draught restrictions, limited handling capacity, and infrastructural constraints at most ports on these trades.

Scrapping vessels is another option, especially ones that are non-compliant with the latest emission control regulations (or where the cost of modifying or retrofitting the vessels would be prohibitively high); however, in this case, too, the extent of capacity thus removed will be limited, as the proportion of vessels deemed fit for scrapping is far lesser than the new tonnage being delivered.

2. Emission control regulations and cost of compliance

While shipping is the most eco-friendly mode of transport, the sheer amount of cargo transported every year means that at an aggregate level, the sector’s emission levels are very high, primarily arising from the use of fossil fuels.

In a bid to reduce the carbon footprint of the shipping industry, governments and international organisations have introduced wide-ranging regulations that target various aspects of vessel operations, from the use of biofuels to installing scrubbers to measuring the energy efficiency of individual vessels to demarcating emission control areas (ECAs).

The latest in the series of such measures is the European Union’s Emission Trading Systems (ETS), whereunder, starting from 01st January 2024, vessels calling at EU ports (and certain other ports) will need to purchase carbon credits. The threshold covering the proportion of carbon emissions for which credits need to be purchased will increase each year, starting from 40% in 2024.

The EU has also introduced the Carbon Border Adjustment Mechanism (CBAM) intended to reduce emissions on imports to the EU.

Covering carbon-intensive products such as fertilizers, iron and steel, and cement, the CBAM is intended to cover possible loopholes where companies relocate manufacturing to countries with less stringent environment protection policies or where imports of such products replace more eco-friendly products that are manufactured in the EU. It is mandatory for EU members to report emissions on a quarterly basis, with the first report due on 31st January 2024.

The cost of complying with these regulations is considerable and will impact Carrier’s margins and business models. With rates dropping sharply and margins back to wafer-thin levels, Carriers do not have much leeway to absorb these costs and have already announced various surcharges to pass on the costs to customers.

In 2024, this will translate into higher freight rates and TCO, as well as an increase in the administrative and procedural tasks involved in monitoring emissions and ensuring compliance.

Carriers and shippers will also respond by limiting calls at EU ports and instead redesign their service networks to call at alternate ports such that the ETS charges are minimised, leading to changes in sailing schedules and ports of call. As an aside, it must be noted that in anticipation of such evasive steps that could be construed as violating the spirit of the law, the EU has brought certain non-EU ports under the ambit of the ETS scheme.

One of the implications for container shipping is that besides the increase in costs and the administrative workload, these emission control measures will also have the effect of moderating capacity, as noncompliant tonnage will be scrapped (though the extent will be slight).

3. Geo-political tensions and military conflicts: which will precipitate realignment and duplication of supply chains, with consequent alteration in trade patterns

2024 will likely witness an intensification of trade wars, military conflicts, and other geopolitical factors that have weighed upon international trade and shipping in the recent past.

The impact of military conflicts will influence the shipping industry, both directly (as has happened in the case of the attacks on commercial shipping in the Bab el-Mandeb straits, where Houthi rebels have been successful in disrupting international shipping) or indirectly (in the case of the ongoing Russia-Ukraine conflict, which has pressurised the global economy and created recessionary pressures in European countries).

A potential flashpoint in 2024 could be Taiwan, where some Western analysts are apprehensive of Chinese military action (akin to Russian action in Ukraine).

Should this happen, the hostilities will directly impact shipping activity in the region, and we will also see an indirect impact in the form of economic sanctions, as were imposed on Russia (the difference, of course being factors such as the deep entrenchment of China in global supply chains, its control of critical raw materials and dominance in the manufacturing of electronic and high-tech products such as semiconductors, all of which will render decoupling a highly difficult exercise).

Trade wars and economic sanctions will also influence international trade patterns and economic engagement in 2024. With Western corporations increasingly looking to diversify sourcing origins to alleviate risks arising from excessive reliance on countries like China, as well as Western governments backing friend-shoring initiatives, combined with the undeniable prudence of moving at least a portion of manufacturing capacity closer home (termed “nearshoring”, intended to shorten supply chains, so as to gain better control and to reduce the possibilities of disruptions and delays), 2024 will see the emergence of new trading partnerships between geographically proximate countries (such as the US and Mexico or EU countries and Turkey), stronger economic ties between politically aligned countries, alteration of cargo flows and shipping routes, and reallocation of shipping capacity.

Economic sanctions and restrictions on technology transfer will also make imports from sanctioned countries more expensive, creating an imperative to shift production to alternate locations.

An example of this is the growing investment in manufacturing capacity in Mexico, which offers the benefits of being sanction-free, closer to US markets, connected via multiple transport modes, and cultural affinities.

An interesting point to note is that Chinese companies have ramped up their investments in Mexico and have been proactive in setting up plants there, which helps them evade tariffs and duties levied on Chinese-manufactured products.

At the other end of the spectrum, we have seen greater collaboration and trade between Russia and China.

Companies will have to create parallel supply chains, one aimed at the Western markets and the other at Chinese and other markets, to ensure that they benefit from manufacturing in China while also catering to the US and European consumer markets.

Since these situations can be resolved only through political negotiations, bilateral dialogues, and military deterrents, it is difficult to hazard a guess regarding timelines for a possible resolution.

It would be reasonable to expect that this will define international maritime trade in 2024.

4. Extreme weather events

With weather analysts forecasting a severe El Nino in 2024, there is a greater probability of the occurrence of extreme weather events, which have the potential to impact international shipping.

An example is the Panama Canal, which has been grappling with low water levels caused by drought and scanty rains, which in turn reduced the Canal’s ability to handle fully laden vessels. As a result, the Panama Canal Authority was compelled to announce restrictions on the number of vessels transiting the Canal, as well as impose weight and draught restrictions. The result was a reduction in effective capacity, which eroded the utility of the Canal. Forecasts for poor rainfall in 2024 indicate that this situation will continue well into 2024.

Likewise, the Rhine River in Germany and the Great Lakes in the US, both of which play a crucial role in barge transport, have been afflicted by low water levels.

Implications for Container shipping

Severe weather events impact the shipping industry in myriad ways, witnessed in the form of lower volumes, changes in trade patterns, revisions to ports of call and vessel deployments, modal shifts, increased pressure on other transport modes, congestion, delivery delays, etc.

Some of the more prominent changes are explained below:

a) US intercoastal volume shift: The US, by virtue of its geographical size and number of trading partners, has cargo coming to both its West Coast and East Coast ports. Traditionally, West Coast ports have been the preferred gateways and have better infrastructure and greater capacity, while the major consumption centres are located on the East Coast.

During the peak of the covid-induced congestion at West Coast ports such as Los Angeles and Long Beach, shippers and carriers started using the Panama Canal route to call at East Coast ports, with the dual objectives of avoiding the congested USWC ports and ensuring that their supply chains remained at least partially functional.

In the long run, the intent was to create an alternative route and infuse resilience in the overall supply chain. This caused the proportion of cargo handled at USWC ports vis a vis USEC ports to be inversed, which was maintained even after the COVID crisis abated. Now, however, low water levels at the Panama Canal have compelled Carriers and shippers to redirect move volumes to the USWC ports, thus bringing the intercoastal split closer to historical levels.

b) Modal shift towards Road and Rail: The curtailment in the effective capacity (both shipping vessels and cargo) that waterways can handle will inevitably drive a modal shift towards alternate modes of transport, like road and rail. Examples include Carriers now providing rail and road options to the Panama Canal or Rhine River barge cargo being transported by road. This not only increases the cost of transportation but also gives rise to more emissions. Additionally, the scale of maritime transport generally cannot be replicated in road or rail, wherefore a sudden shift will strain the rail/ road capacity, causing delays and congestion.

5. Changes to global trade wrought by concepts such as Friendshoring/ Nearshoring/ China + 1/ Decoupling and Derisking

As the traditional China-centric supply chain model was supplanted by procurement strategies which emphasised shortening supply chains, diversifying souring locations, and bolstering economic ties within politically aligned blocs, we saw the emergence of new routes and trading relationships.

In one such development, Mexico replaced China as the USA’s largest trading partner, while other Asian countries such as Vietnam, Thailand, Malaysia, India, and Bangladesh increased their share of exports to America (in the manufacturing sector). In the high-tech and electronics sector involving products like semiconductors, South Korea and Taiwan became preferred partners, as curbs were imposed on technology transfer to Chinese entities.

Whilst China has a formidable advantage in terms of scale and infrastructure in the manufacturing of most products and hence is likely to remain a critical component of any company’s sourcing strategy, other countries will increase their share of manufacturing and exports as we move into 2024.

Further, with China focussing on moving up the value chain and with its historical cost advantage eroded by rising wage levels, a significant proportion of the manufacturing of low-cost goods will shift to other countries.

Additionally, given the dependence on Chinese raw materials and components, instead of a complete revamp of supply chains, we will see the somewhat counterintuitive phenomenon of elongated supply chains, where Chinese components will be exported to new manufacturing centres in other countries, from where the finished goods will be exported to Western countries.

This will create even greater interdependencies and more intricate supply chains, where local issues could have international ramifications (to take a hypothetical example, production or transport disruptions in China, which hinder exports of buttons and raw materials to Vietnam, will impact production and export of Vietnamese garments to Western countries).

Lastly, to evade sanctions and tariffs, Chinese corporations are increasingly investing in foreign companies (that are not subject to sanctions, such as Mexico), which will provide further impetus to the shift of manufacturing capacity, while remaining in Chinese control. Taking cognisance of this development, Western governments are evaluating measures to impose stringent rules of origin.

For the shipping industry, this will translate into the need to introduce new services connecting the newer manufacturing centres, which will also imply a change in fleet composition (to incorporate smaller vessels, which can be accommodated at the newly added ports of call).

6. Shift in the centre of global trade from advanced economies to emerging economies

Global trade and growth have historically been driven by developed economies in the Western hemisphere, while Asian and African countries have largely been the source of raw materials, commodities and low-end general merchandise.

Advanced economies dominated the economy and accounted for a significant proportion of the global demand for shipping services (which in turn drove demand for raw materials and commodities).

The balance of power has, however, been gradually shifting towards the Orient, primarily due to China’s position as the factory of the world and of late, abetted by the rapid pace of growth enjoyed by developing nations like India, the ASEAN countries, and other emerging economies.

Developed and advanced economies, on the other hand, have been struggling with low growth rates and, in the last 2 years, have been facing recessionary pressures, resulting in a relative diminution of their weightage in the global economy. This is especially true for European countries such as Germany, France, and Italy, which have been battling with a lack of labour to drive their manufacturing-oriented economies and also have to contend with a subdued domestic sentiment.

This shift of economic heft is amply illustrated by the fact that, as per IMF estimates, China and India are expected to account for approximately half of the world’s growth in 2023 and 2024.

For the shipping industry, this would translate into higher export and import volumes to these emerging markets, necessitating reallocation of capacity and reconfiguration of sailing networks.

Thus, instead of having the bulk of shipping capacity connecting established manufacturing centres and advanced economies, carriers will now need to cater to growth markets and new sourcing locations.

This ipso facto also implies a change in the composition of vessel sizes in the global fleet. While ports in China, Europe and the US were capable of handling vessels of over 20,000 TEUs to serve emerging markets, Carriers will need to incorporate a greater number of smaller-sized vessels (5,000 to 15,000 TEUs).

This trend will also lead to a spurt in intra-regional trade, as rapidly developing countries trade more with each other, with manufacturing shits and supply chain interdependencies also creating new demand for components and raw materials. Carriers will have to reallocate vessels and equipment to cater to this cargo while correspondingly reducing capacity on existing routes.

7. Focus on Sustainability, circular supply chains and reverse logistics

With the broad-ranging emission control limits that Carriers have to ensure compliance with, and further considering that the permissible limits will be lowered successively in forthcoming years, Carriers have been compelled to proactively focus on sustainable operations and reducing their carbon footprint.

The intent is not only to comply with existing regulations but also to stay a step ahead and ensure that they meet emission control targets well before the stipulated deadlines.

In fact, most major carriers have already embarked upon the journey towards decarbonisation and have set themselves ambitious targets, with Maersk Line and Hapag Lloyd being examples in this regard. While the IMO has targeted net zero emissions for the shipping industry by 2050, Maersk Line has stated ambitions of reaching net zero by 2040. Hapag Lloyd has likewise set itself the target of reaching net zero by 2045.

Most other companies have allocated significant funds towards decarbonisation initiatives and have embarked upon various projects to ensure this.

In 2024, this focus will only intensify as Carriers increasingly prioritise sustainability and align commercial strategies and business objectives therewith.

Providing further impetus from the demand side are major exporters, retailers, and manufacturers who too are equally (if not more so) focussed on reducing their carbon footprint, wherefore they, as customers of Carriers, are demanding more eco-friendly or green solutions. Since studies have found that a sizeable number of end-consumers are willing to pay a premium for eco-friendly products, it makes business sense for Carriers, exporters and importers to invest in green supply chains – a trend that will gather further momentum in 2024.

For the bigger Carriers, awash with surplus funds generated during the preceding 2 years, the cost of compliance with environmental regulations is manageable, increasing the probability of all stakeholders in the supply chain playing their part in reducing overall emissions in the transport process.

Some common methods and strategies employed by Carriers to reduce their carbon footprint include:

a) Order new vessels with energy-efficient designs and engines
b) Slow steaming to reduce bunker consumption and, thus, emissions (with the added benefit of savings on bunker costs)
c) Using less-polluting fuels, such as LSFO, bio-fuels, LNG, etc. Carriers are also investing considerable amounts in R&D to determine the fuel efficiency and emission levels of alternate fuel types and combinations thereof in order to find out which fuel is the least polluting one.

As part of the endeavour to make supply chains greener, Carriers, manufacturers, and exporters will also develop circular supply chains and reverse logistics capabilities, where waste or end-of-lifecycle residue is disposed off in a responsible manner.

8. Other derivative trends

Apart from the major trends covered above, we will witness a number of other trends at play during the course of 2024, arising from the interplay of the major trends and diverse geopolitical and macroeconomic factors.

The notable ones among these are:

a) Carriers competing on rates: As capacity surpluses and the pressure to ensure higher utilisation levels exacerbate with the new tonnage entering the market, it is highly probable that Carriers will resort to undercutting prices in order to retain market share or capture volumes from competitors.

This has already been evidenced since the last quarter of 2023 and will likely continue throughout 2024 (subject, of course, to supply-side scarcity created due to military conflicts that threaten shipping through the Suez Canal and other factors which could have the effect of reducing effective capacity).

Bigger players in the industry, with their cash reserves, are more likely to attempt to undercut competitors, as they are in a better position to absorb losses in the short term.

The other rationale is that smaller players will not have the financial cushion to sustain in a low freight rate environment, leaving them vulnerable and more prone to going out of business, which will, in the long run, reduce the levels of competition in the industry and thus benefit the remaining players.

b) Break-up or reshuffling of Container Alliances: The container shipping industry has been dominated by Container alliances since the turn of the century, which collectively now control a large proportion of capacity.

MSC took the bold step of breaking up with its 2M alliance partner, Maersk Line, and is set to operate services on its own. MSC was enabled to do this due to having invested heavily in new and second-hand tonnage from 2021 onwards, which now leaves them with the scale to operate standalone services while ensuring adequate presence in all major trades and markets. While the split will be official in 2025, both carriers have already started treading their separate paths.

Although Maersk intends to position itself as an integrated logistics service provider, offering end-to-end logistics services and has been focussing on building up first and last-mile delivery capabilities, as far as container shipping services are concerned, their smaller orderbook will mean that they will be at a distinct disadvantage in an industry where scale is critical.

In this scenario, the pragmatic course of action open to Maersk would be to look at options to join or form another alliance, possibly leading to a reorganisation of existing alliances and the creation of new ones.

c) Divergent growth strategies pursued by Carriers: In the past, Carriers have mostly been guided by a similar approach towards growth through their quest for scale and pursuing economies of scale. In the post-COVID environment, Carriers have embarked upon different strategies and growth plans that they perceive will leave them well-poised to capitalise on changing customer preferences in a rapidly evolving industry.

While MSC aggressively acquired tonnage to displace Maersk from the top slot, Maersk attempted to acquire logistics assets to complement its shipping services. Carriers like CMA-CGM have adopted the middle path, with investment both in vessels and logistics assets, while Hapag Lloyd has essentially focussed on its core container shipping business, while also investing in ports and terminals.

With these developments continuing in 2024, we will see Carriers competing on varied value propositions, with their go-to-market strategies designed to play to their strengths and incorporating newly acquired assets and logistical capabilities.

Source: Marine Insight

A common refrain about the container shipping industry is that it has become highly commoditised. Analysts describing the prospects and nature of the industry, while discussing the challenges faced by the container shipping industry and its customers and stakeholders, often decry the trend of commoditisation as being one of the factors responsible for the deteriorating schedule reliability and customer service levels.

Simply put, the concept of commoditisation of any product refers to a situation where all competitors in the market start offering a standardised product with similar characteristics and uses, leading to a situation where every competitor’s product is identical.

This lack of differentiation leads to customers having no way or reason to select one manufacturer’s product over the others, making price the sole (or primary) parameter in the buying decision.

Under these circumstances, manufacturers will have to resort to lowering the prices of their products in order to entice customers to buy them.

Once a particular manufacturer has reduced its price, other manufacturers will be compelled to follow suit, failing which they will lose market share. Their product sales will start falling rapidly (since customers get a similar product at a lower price, they have absolutely no incentive to buy competitors’ products and thus pay more for a similar alternative).

In the case of services, however, given the inherent difference from tangible products, it is the process and mode of delivery of the service that will create the holistic customer experience and play an important role in the customers’ perception of the quality received in lieu of the price paid.

Given the intangible aspects and the element of subjectivity, it is relatively difficult for competitors to replicate a service that is available in the market, wherefore commoditisation of services is less common.

Commoditisation of the Container Shipping industry

Container shipping is unique in the sense that carriers essentially offer transportation services, execution of which is done by offering space on their vessels, as well as the use of their shipping containers (unless the cargo owner/ exporter has opted to use a shipper-owned container – which is not very common). Thus, what carriers offer their customer is a mix of intangible elements delivered by using physical assets.

Over the past several years, in response to market conditions and the competitive environment, container shipping has gradually been commoditised. The trend has gathered momentum since the late 2000s, when the massive influx of incoming capacity, coupled with recessionary pressures, compelled carriers to embark upon price wars and undercut competitors in their bid to retain market share and ensure reasonable utilisation levels for the incremental capacity that had entered the market.

Over the years since then, as carriers continued their quest for capacity and economies of scale and maintained the vessel upsizing and newbuild ordering spree, supply has generally outstripped demand.

Besides, shippers have shown reluctance to pay a premium for superior quality and service, as a consequence whereof carriers have reconfigured their product portfolio to offer standardised services at prices which are on par with what competitors are offering and aligned with what customers value and are willing to pay for.

Also, in response to wafer-thin margins, carriers started rigorously focussing on their cost base, with the objective of paring to the bone expenses that were not related to their core business or generated revenue. As a result, all the features and service elements which failed to materialise commensurate revenue were often discarded to provide a basic service which was sufficient to meet the customers’ primary requirements.

Attempts were also made to standardise the process and minimise exceptions as much as possible so that it could be managed smoothly with minimal effort, and also reducing complexity, resources utilised, and effort expended.

This industry-wide endeavour to rationalise costs, standardise the broad process, and increase efficiency led to all carriers offering similar products at comparable service levels – which further contributed to the spread of commoditisation.

Another interesting aspect is that certain trade lanes have been more susceptible to commoditisation than others. Trade lanes which have a profile matching the most common elements of the container industry are likely to be commoditised earlier and faster, i.e., where the assets and services needed to cater to the trade are typical ones, the probability and pace of commoditisation is far greater.

For example, dry containers are much more common than reefer containers (because the proportion of dry cargo is much higher, besides which they are cheaper to procure; hence, more container carriers can afford to invest in them rather than in the more expensive reefer containers). Therefore, on trades with a higher proportion of dry cargo, such as the Asia-Europe trade, more carriers will have more equipment, enabling them to mirror products offered by the competition, leading to the commoditisation of services.

On the other hand, in trades involving South America, which exports large quantities of fruits and agricultural products, the proportion of reefer cargo is higher than in most other trades. Therefore, to serve this trade, Carriers will first need to invest in the more expensive reefer containers, which could act as a barrier to entry for competition and hence moderate the pace of commoditisation (it must be emphasised that this factor will only slow the pace of commoditisation, and not halt it completely, because an increasing number of carriers are now investing in reefer containers.

So, a decade or so back, shipping companies like Maersk had a much higher inventory of reefer containers vis-a-vis competitors, providing them with a distinct competitive edge on such trades; competitors have in the last few years also purchase reefer containers, thereby enabling them to serve this trade effectively. The increased competition and consequent provision of similar services will, therefore, slowly lead to the commoditisation of container services in these trades as well).

This logic also holds for special equipment, such as flat racks, open tops, and tank containers, which only the bigger carriers would hold in sufficient quantities in their equipment pools. Therefore, in verticals like project cargo, where such equipment is more likely to be utilised, the bigger carriers can offer services that are, to some extent, differentiated.

A variant of this is geographically niche services, where companies look to start services connecting hitherto underserved regions.

This would include developing countries with high growth rates and ample scope for industrialisation. Examples are countries in East and West Africa, where operational challenges have thus far deterred carriers from running services.

Companies like Maersk and MSC, with the scale and wherewithal to tackle the operational and ground-level challenges, were better placed to design products connecting these countries with the rest of the world, something their competitors could not readily replicate.

This barrier to entry thus helped stem the tide of commoditisation initially. As in most other instances, though, the other bigger carriers (such as Hapag-Lloyd, CMA CGM, and COSCO), in their pursuit of new high-growth markets, have realised the potential of such niche trades and started offering services thereto, which once again inevitability led to commoditisation.

To summarise, the level of commoditisation depends on the commonality of the type of cargo to be transported and the equipment required, as well as the ease of serving the region/ country, the difficulties posed by which will delay the trend of containerisation until the competition is in a position to offer similar services.

Reasons for commoditisation of container services

Having understood the concept, the background and the prevalence thereof, let us now delve into the reasons for the commoditisation of container services.

1. Upsizing of vessels and excess capacity creating a demand-supply imbalance

Perhaps the biggest reason for the commoditisation of container shipping was the influx of capacity due to the ambitious fleet augmentation and upgradation initiatives programmes undertaken by almost all Carriers, which steadily eroded the very idea of product differentiation.

While Carriers until 2000s had their own strengths and niches that they operated in (such as Maersk and Evergreen being global carriers which offered multiple connections across all major trading routes or the likes of the now defunct Hanjin Shipping, which had a smaller fleet but controlled a lot of South Korean exports or regional carriers like RCL, whose focus of operations was a limited geographical area, often the intra-regional trades), the boom in global trade and the accompanying rapid growth of containerised transport meant that all Carriers started investing heavily in new tonnage to capture a larger share of the growing container transport segment.

Consequently, the growth in supply started exceeding demand for shipping services, and the supply-demand imbalance widened further with the recession in 2008-09 and in the subdued economic environment thereafter.

Left saddled with behemoths and strained by the pressure of ensuring adequate cargo to maximise utilisation of their expanded fleets, Carriers were left with little option other than to cut prices in order to get more cargo.

Since most global carriers now had ample amount of capacity and equipment, their competitive position was strengthened, and they embarked upon debilitating price wars to capture market share.

The result was that carriers gave up all attempts at differentiation and started offering standardised services and competing on price, contributing greatly to the rapid commoditisation of the container shipping market.

2. Low barriers to entry

Attracted by the growth and potential of the container shipping segment and aided by the relatively easy availability of ship finance in the 2000s, competition in the industry intensified.

The barriers to entry were low since carriers could start their own container shipping business with relatively fewer investments (even though vessels are extremely high-value assets and building an appropriate pool of containers can be expensive, which, combined with establishment and manpower costs, would necessitate massive CAPEX, Carriers could reduce the upfront investment using strategies such as chartering vessels instead of owning them, sell and lease-back options for vessels, leasing containers, appointing agents at destination countries rather than setting up own offices, serving only limited geographies where they had inherent advantages etc.) wherefore more carriers could offer container shipping services, of a level and quality comparable to that of existing players.

This created a situation where the number of product offerings increased, with a corresponding decrease in product variety/ diversity). Since carriers then had to compete on prices, container shipping was further commoditised.

3. Space-sharing agreements and Container alliances make differentiation difficult

Since the beginning of the 2000s, Carriers have been collaborating extensively through container alliances and slot-sharing agreements. This is done with the intent of offering wider geographical coverage than any single carrier could offer on its own, as well as increasing vessel utilisation levels, in a bid to optimise the asset turnover ratio and ROI of these expensive vessels. What this essentially entails is multiple carriers carrying their customers’ cargo on the same vessel.

So, while each carrier will market their services separately and try to sell them to customers as a unique product, in reality, since all carriers use the same vessel, they are, in essence, offering the same product.

Thus, carrier cooperation agreements lead to commoditisation.

4. Focus on short-term returns and survival rather than long-term strategy

Given the cut-throat nature of competition in the container shipping industry, shipping carriers are not in a position to take the long-term view or make decisions that will lead to sustainable growth in the future.

The intense struggle to retain volumes and grow at the expense of competitors has led to carriers focusing on short-term survival tactics, where the intent is to stay afloat until the industry cycle reverses and the uptick pushes freight rates into profit-making territory again.

This mindset impedes attempts to design differentiated products and instead makes carriers take a myopic approach and offer customers only the most elemental of services.

5. The quest for efficiency led to standardisation and, thus, loss of differentiation

The international shipping process is beset with complexities, with a multitude of variations to the process depending on the jurisdictions and commodities involved. Carriers are now attempting to standardise the transport process by reducing the number of exceptions allowed and mandating that their customers follow the same broad process (of course, with reasonable allowances made for logical reasons).

This standardisation has furthered the similarities in the services offered by various carriers, increasing the extent of commoditisation.

6. Flexibility: Carriers unwilling to be flexible regarding standard processes

In a bid to capture more business and differentiate themselves from the competition, Carriers would previously offer a certain degree of flexibility to customers in terms of late cut-offs, extended free time, dedicated customer service focal, etc.

Permitting this flexibility involved incurring additional expenses, which pushed the carriers’ cost base upwards and often could not be recovered from customers.

With the enhanced focus on rationalising costs, Carriers started adhering to their standard processes more stringently, thereby reducing the flexibility offered to individual customers. With processes becoming highly standardised across the industry, the level of commoditisation increased.

7. Lower slot costs enable carriers to compete on price

The rationale underlying the commissioning of bigger vessels was to reduce the slot costs per container, enabling the carrier to reduce operating costs and thus increase their operating margins or capture more business by passing on the savings to customers through lower rates.

This approach shifted the focus from service levels to freight rates, where carriers opted to leverage the reduced cost base to undercut competition, paving the way for commoditisation.

8. Slim margins and cost pressures

The pressure to compete on rates, in conjunction with the historically low margins, led carriers on a downward spiral, where wafer-thin margins were further depressed by price wars.

In response, carriers started eliminating non-revenue generating activities (costs for which could not be recovered from customers). Instead, they focused on offering basic standardised services, which lacked any differentiating features whatsoever.

An example is how carriers have invested in well-designed websites and apps and are slowly guiding smaller shippers and cargo owners towards using self-service or telesales channels instead of allocating a full-time sales or customer service representative.

The idea is to reduce manpower and instead create digital platforms which empower the customer to manage and track the booking himself.

9. Cargo owners (BCOs) are reluctant to pay premiums for superior quality of service or faster transit times

With the globalisation of manufacturing activity and dispersed supply chains becoming the norm, manufacturers and cargo owners are exporting and importing far more volumes than before. This translates into a massive surge in transport and procurement expenses, representing a significant cost element.

Due to subdued macroeconomic fundamentals, even manufacturers across industries are pressured to reduce costs. With shipping procurement spending representing a big proportion of their transport costs, BCOs give greater weightage to price while evaluating transport vendors. They are, therefore, open to contracting basic-level services at low rates.

This reluctance to pay a premium for a superior quality of service has lessened the imperative for carriers to offer differentiated services at higher prices, which in turn adds to the degree of commoditization.

10. Bigger vessels reduce the number of ports that they can call at, limiting options and, thus, differentiation

Apart from the surplus capacity and the pressure on freight rates that bigger vessels exert, there is another operational aspect of mega vessels that hinders product differentiation. By virtue of their bigger size and heavier weight, ULCCs require deeper draught to be able to call at a port.

Because draught is essentially a natural characteristic and dredging is effective only to a certain extent, there are a limited number of ports in each region which possess the draught necessary to accommodate mega vessels, which constricts the number of ports that a mega vessel can call, and in turn curtailing the number of direct port calls, effectively reducing the port-pair combinations / direct routing options that the carrier can offer to customers, thus leading to a commoditised service (where all carriers serve the same mega ports).

11. The “Hub and Spoke” model decreases the number of port-pair combinations/ direct services offered, lessening the differentiation between competing services

The limitations imposed by deep draught requirements that curtail the number of ports which mega vessels can serve have also led to the prevalence of the: hub and spoke” model, involving transhipment at mother ports, whereunder carriers deploy mega vessels to serve major ports in all regions and reduce the number of services to/from smaller ports (effectively consolidating in fewer big vessels the volumes that were hitherto carried by a greater number of smaller vessels).

Containers destined for smaller ports in the vicinity are then discharged at the transhipment port and then loaded onto feeder vessels, which can call the feeder ports in the vicinity.

Given that there is only a limited number of ports/terminals that can handle mega vessels, all carriers must, of necessity, confine their basic services (connecting the mother ports in the origin and destination regions) to the same ports, resulting in commoditisation.

12. Growing consolidation in the container shipping industry

The container shipping industry has witnessed numerous mergers and acquisitions over the past two decades, leaving the industry more consolidated than it was at the beginning of the century.

Bigger carriers have tried to build operational scale and geographical presence by growing both organically and inorganically, with smaller carriers who were unable to withstand competition being acquired by bigger carriers.

Post the rounds of consolidation and exits witnessed since 2000, there now exists a smaller number of bigger players (as opposed to a handful of bigger players, a few medium-sized players and a number of smaller players), each with the financial resources (especially in the post-covid environment) to operate at the global level even in an unprofitable environment.

With similar objectives and enough resources available to achieve those objectives, these dominant carriers offer a uniform level of services across most trades.

13. Products can be easily replicated by competitors, thereby eliminating the element of novelty and product differentiation

With little to prevent competitors from replicating any new service designed or innovation introduced by a particular carrier, the advantages of differentiation are short-lived.

Any innovation will instantly be mirrored by other industry players, thus negating the differentiating factor and commoditising the service.

14. Carriers have been focussing on basic ocean shipping services and moving away from landside/ other value-added services

While most Carriers have traditionally also had a freight forwarding or logistics arm, as well as investments in port assets (with some Carriers even investing in oil, airlines, supermarkets and rail companies), as the shipping markets receded from their highs in 2008, Carriers increasingly started focussing on their core container shipping business and divested non-core activities, including logistics and port assets.

Since product differentiation was primarily based on land-side activities, and Carriers were now confined to only offering basic shipping transport, they had little scope to offer services that were distinct from those offered by other market players, leading to the commoditisation of their primary business activity.

15. The democratisation of information and proliferation of digital forwarders and freight management platforms

Carriers have traditionally relied on manual rate sheets and emails to quote rates and share other pertinent information regarding sailing frequency and transit times. Cargo owners and freight forwarders, therefore, had to approach numerous Carriers to obtain quotes, which often took a few days, and could compare information only for carriers who reverted on time. Therefore, exporters often did not have complete visibility of the prevailing market rates, and decisions were generally made basis incomplete information.

Nowadays, with the extensive use of digital freight management tools and logistics technology, customers can retrieve in a few minutes rates offered by all carriers for any port pair combination and, therefore, immediately compare rates and service levels and make an informed decision.

This democratisation of information has meant that exporters have access to all the data required to objectively evaluate alternatives and select the one that best meets their requirements and at the optimal price.

Due to this, Carriers are forced to offer sharp rates in line with what is offered in the market to avoid losing the customer. Ultimately, this does degenerate into competing on prices, with other carrier/ service evaluation criteria being rendered secondary.

Future trends

While the container industry has become highly commoditised, the windfall profits earned in the post-COVID years have afforded Carriers a substantial financial cushion to create new sources of corporate and product differentiation. With the healthy cash flows, Carriers have deleveraged and strengthened their balance sheets and thereafter utilised the surplus funds to carve a niche for themselves, in line with their long-term strategic vision.

These attempts at rebranding themselves and building a new business model include:

Maersk’s strategy to position itself as an integrated logistics service provider by investing heavily to scale up its logistics capabilities across the globe and in different verticals, by acquiring strong regional players and also investing in assets, with the intent of becoming an end-to-end logistics services provider, rather primarily focussing on its traditional container shipping business.

Maersk has prioritised its growth in the logistics segment at the expense of its container shipping business, resulting in it losing its long-held position as the world’s largest container carrier to MSC (and an analysis of current order book suggesting that even CMA-CGM could overtake when their newbuilds are delivered).

MSC has taken the diametrically opposite approach, focussing extensively on building its fleet through acquiring vessels and also placing orders for new tonnage. MSC aggressively acquired tonnage during the peak of the supply chain disruptions in 2020 and has shown little signs that its appetite has whetted since then.

The magnitude of its fleet expansion has been such that it has left Maersk far behind in terms of operated capacity. MSC has also invested in logistics assets and acquisitions but on a smaller scale than Maersk. Looking at its strategy and the size of its fleet, it is quite conceivable that MSC will have to undercut prices to fill its vessels and offer an extensive network of services with similar service quality.

CMA CGM has taken the middle path and tried to strike a balance between the two contrasting approaches adopted by Maersk and MSC by investing in vessels and logistics capabilities alike. CMA CGM has both purchased and chartered vessels in recent years, as well as placed orders for new vessels. Its order book is of a scale that enables it to surpass Maersk and take the number 2 spot amongst container carriers.

In terms of logistics assets, it has targeted inorganic growth through the acquisition of global freight forwarders and local players as well. At the global level, it has acquired prominent freight forwarding companies like Ceva Logistics and Bollore. In contrast, on the local level or in niche segments, it has invested in companies such as Gefco, Ingram Micro, and Stellar Value Chain Solutions. Looking at its pattern of acquisitions, it is likely that the company will try to differentiate its services by offering end-to-end transport solutions.

Hapag Lloyd was one of the most highly leveraged companies prior to COVID-19. After the exceptional bull run in the post-COVID market, the company used its profits to retire existing debt, as well as invest in new tonnage, besides some investments in logistics and port assets. Hapag Lloyd has seen a turnaround of sorts, with the largely successful implementation of its multi-year global strategy.

The company’s stated approach to differentiate its products is to identify unmet customer needs (through customer surveys and face-to-face interviews) and then design premium solutions around those needs. Hapag Lloyd is focussing on high-value cargo (reefer commodities and special equipment such as flat racks and open-top containers) in its attempt to counter market commoditisation.

Overall, carriers are cognisant that the market has devolved into a highly commoditised one and are aware of the long-term consequences of this trend. They are, therefore, trying to counter this by devising appropriate corporate strategies and altering their business models to meet changed ground realities.

While the attempts at offering differentiated services and trying to position themselves apart from competition may or may not be successful, it is nonetheless evident that carriers are making concerted attempts to counter the trend of commoditisation.

Source: Marine Insight