Trends in Container Shipping in 202230/05/2022
Continuing from our previous article where we covered the primary trends expected to drive the Container Shipping industry in 2022, we will in this article delve into certain other factors that will undeniably exert considerable influence on the industry, over the course of the next 2-3 years.
Some of these are fundamental in nature and portend an industry-wide change in mindset and way of working, leaving a long term mark.
1) Increased regulatory scrutiny
One of the regulatory threat factors stemming from concerns regarding ostensible market concentration and allegations of profiteering in the midst of the global supply chain crisis is the increased scrutiny that the industry, major players therein and container carrier associations face from various governments and statutory anti-monopoly bodies.
The background is that the Container Shipping industry has witnessed a number of mergers, acquisitions and takeovers since the early 2000s. Some of the more notable ones involving global carriers include Maersk taking over SeaLand, P&O and Hamburg Sud, CMA CGM acquiring APL, Hapag Lloyd taking over UASC, and COSCO buying out OOCL and the three main Japanese Carriers (NYK, MOL and K-Line) merging to form ONE.
The resultant decline in the number of market participants prima facie creates the impression that competition is reducing and that the container shipping industry is becoming highly concentrated.
Additionally, the period since Covid has been characterized by unprecedented levels of supply chain disruptions, with congestion plaguing all major ports across the globe and shippers paying rates 10 times the historical average, while still receiving markedly deteriorated service levels.
Carriers however have made record profits in 2020 and 2021, in part due to the congestion and capacity and equipment shortages, prompting other stakeholders to allege causation between the disruptions and Carrier profitability, abetted by collusion.
While not a lot of tangible evidence has been presented in support of these claims, the magnitude of supply chain issues, the resultant increase in end-user prices and the overall inflationary impact have created sufficient public pressure to compel numerous Governments to launch preliminary investigations into what Shippers construe to be malpractices.
It is in this context that the US Government and FMC have been looking into importers’ complaints about excessive Detention and Demurrage charges, as well as acting upon exporter’s allegations of Carriers not allocating adequate equipment for American exports on the backhaul legs.
The Chinese government has over the last 2 years looked into Exporters’ complaints regarding excessive quantum of surcharges, even going to the extent of asking Carriers to share their costs and comparing them with the surcharges levied and collected. While no conclusive case of profiteering was made out, the pressure made Carriers agree to put on hold further increases in handling and other local charges.
Given the ground realities, the probability of Carriers being found guilty of price-fixing seems low; however, in the face of increased scrutiny, Carriers have deemed it expedient to voluntarily put on hold and increase in spot rates and surcharges.
This increased scrutiny will likely be a persistent trend over the next 2 years until the markets are correct and a semblance of parity is restored between Carriers and Shippers.
2) Mergers and Acquisitions
As explained in the above point, Mergers and Acquisitions have been the defining trend in the Container Shipping industry over the past 2 decades, so much so that the competitive landscape has undergone a sea change since 2000.
M&A activity over the years has focused on both global level players as well as niche market players. Examples of the former include Maersk’s takeover of SeaLand, P&O and Hamburg Sud, CMA CGM taking over NOL/ APL, Hapag Lloyd acquiring UASC and CSAV, ONE formed through the merger of the 3 Japanese containers carriers, while the latter category includes Hapag Lloyd’s recent acquisition of DAL (a strong player in the African trades).
With Carriers flush with cash from the record level profits in 2020 and 2021, there is growing cognizance of the necessity of strategically utilising their windfall gains to strengthen their competitive position, with continual scouring for potential acquisition candidates. The numerous acquisitions over the years have meant that there are only a few companies left who could be deemed valuable candidates (the top ones are too big to be brought out while the smaller ones are not attractive enough), therefore prompting Carriers to be strategic in their choice of targets.
It is however exceedingly probable that the bigger Carriers will continue their takeover spree and grab any companies of strategic or tactical value, even if it means paying a significant premium over current valuations (far beyond what would be considered a fair price, in normal circumstances).
Further, this acquisition activity is not restricted to within the industry but stretches upstream and downstream to include players active in other segments of the supply chain.
3) Customer Centricity
While container liner schedule reliability has never been exceptionally good, it is often explained as a factor of the low freight rate environment that Carriers operate in (which compels Carriers to pare costs even at the expense of schedule integrity and service levels). Shippers have viewed this as a trade-off between rates and service (lower rates equate to low reliability).
Since 2020 however, incessant supply chain disruptions have driven freight rates upwards, while simultaneously causing service levels to plummet to abysmal depths.
This is created disaffection amongst shippers and end consumers, increasing their propensity to change Carriers and prioritise short term benefits over long term partnerships.
Recognising this, Carriers are increasing focusing on inculcating a customer-centric mindset to better fulfil the needs of customers and improve customer service levels.
Customer centricity involves working on the holistic customer experience, by identifying customers’ expressed and unexpressed needs, designing innovative solutions, therefore, partnering with customers to help them increase their business and using technology to gain actionable insights into the market and customers.
In the long run, this approach will benefit customers and pave the way for robust working relationships.
4) Rise in Integrated Logistics Service Providers
A phenomenon that has been gaining traction over the past few years has been the rise of the Integrated Logistics Service Providers (ILSP). This essentially refers to Container Carriers or Port Operators making concerted efforts to diversify their product portfolio, in their quest to build last-mile delivery capabilities and provide end-to-end service, thus evolving from pure-play transport providers or terminal owners into entities offering the entire gamut of transport and supply chain-related services.
In an effort to mitigate risks from exposure to their primary business segment and also to offer a one-stop solution to consumers, Container Carriers have been increasingly scaling up their logistics competencies. The preferred route seems to be inorganic growth, through the takeover of established players in target segments, which enables Carriers to rapidly scale up and acquire a ready customer base.
All the top Container Carriers have been active in the M&A market, to some extent at least. While Carriers like Maersk have always had a freight forwarding arm and have now focused on targeted acquisitions in key markets, other Carriers have brought out global freight forwarders (CMA CGM acquiring Ceva Logistics or MSC acquiring Bollore Logistics). Of particular interest are players operating in specialized segments, whose takeover enables the acquirer to immediately gain expertise.
Global Port Operators such as DP World have also jumped onto the bandwagon, by acquiring logistics companies and feeder operators, thus building a presence in all the major components of the supply chain, right from inland transport and logistics to shipping to port facilities – thereby providing last-mile delivery services in the real sense of the word.
As the number of obvious and feasible takeover candidates in the Container Shipping industry is dwindling, and also because companies now prefer diversifying their business exposure across various sub-segments, Carriers are increasingly focused on upstream and downstream integration, in the expectation that offering a complete transport solution to customers will increase margins and commercial flexibility, facilitate positioning to a wider customer base, and create stable customer pool.
This trend is only expected to accelerate in the coming years, with a number of global and regional players allocating sizeable reserves for M&A, besides also making public statements of intent about their vision of metamorphosing into ILSPs.
5) High Costs for Carriers, passed on to customers
Carriers anticipate a steep increase in costs in the forthcoming months, which they will try to pass on to customers.
These increased costs are primarily on account of the below:
a) Bunker costs: With the need to comply with regulations lowering the permissible Sulphur content in bunker fuel, Carriers will need to select from a range of options available to ensure adherence and to avoid the risk of penalties and punitive action, besides the inevitable negative publicity in the event of their failure to do so.
Carriers have recourse to 3 alternatives to ensure compliance, each involving considerable costs and with their own associated merits and demerits.
These alternatives are explained below:
i) Installing scrubbers: Scrubbers (also known as Exhaust Gas Cleaning Systems) remove polluting effluents from bunker fuel, which lets the Carrier continue using the existing quality of the bunker. Though ensuring lower bunker costs, it will involve heavy upfront CAPEX required to install the scrubber.
S&P Global has estimated the cost of installing scrubbers between USD 1 to 5 million, depending on the vessel type and size.
Besides this direct outlay, other indirect expenses and opportunity costs include the lost revenue while the vessel is being retrofitted (which can be significant in the current high freight rate environment) and the slots lost due to additional space required for the scrubber (once again a substantial amount due to the current freight rates).
The other risk factor is that a few ports across the world do not permit vessels fitted with open-loop scrubbers to call at the port, to prevent the discharge of scrubber wash water in their territorial and port water.
ii) Using LSFO bunker: This involves purchasing and using a bunker that has already been refined to reduce the sulphur content to comply with the mandated requirements. This option has the advantage of being the most straightforward one, where the Carrier can use the bunker directly, without having to do anything else. Since the bunker is already compliant, there is no need to rigorously monitor discharges for Sulphur content.
Other advantages include the fact that the Carriers do not have to remove the vessel from active service for retrofitting, so the vessel can continue to generate revenue.
No expensive modifications are required to the vessel’s design or structure and the carrying capacity remains the same.
Disadvantages include an immediate impact on OPEX, due to the act that LSFO is much more expensive than normal fuel. Also, over the recent months, the price spread between LSFO and HFO/ Normal fuel has been increasing, implying that Carriers opting for LSFP will see significant cash outflows toward their bunker bills.
Availability of LSFO has also been flagged as a potential risk factor, since it might not be as readily available at common bunker locations, or not in the quantities required.
iii) Alternate fuels: the third option includes the use of alternate fuel types such as LNG, which poses its own set of challenges. Primary amongst these is the need to alter the vessel structure and engine as appropriate to enable it to run on LNG, as well as the availability of LNG.
Most Carriers are using this as a backup option, and newbuilds being commissioned recently are often touted as being equipped with dual-fuel technology, which permits the vessel to operate on LNG as well as another fuel type, thereby offering the Carrier operational flexibility.
b) High charter rates: In the present market, where supply is scarce, vessels command hefty premiums, causing charter rates to shoot up to 2 to 3 times their average historical rates. The demand is so strong and rates so elevated that Carriers are signing up charters for extremely high rates and for far longer periods than before. An indication of the overheated state of the market is provided by the fact that Carriers are willing to charter just about any seaworthy vessel available in the market and even sign up vessels whose current charters are valid for almost a year more.
All accounts indicate that the current market is a seller’s market, with anecdotal reports mentioning Carriers having to bid for tonnage.
To take an example, Alphaliner recently reported that ONE had chartered two 8,000 TEU vessels at $65,000 per day each, for a period of three years.
Even Carriers who have historically had a policy of chartering vessels rather than buying (to conserve cash flows and ensure operational flexibility) have been compelled to pay exorbitant premiums to buy vessels – simply to ensure they control the space required to offer services.
All these factors will inevitably cascade down to the cost base of Carriers, who will raise average freight rates, increasing the probability of higher freight rates for a longer period.
c) High contract rates: While Carriers have typically balanced spot bookings with long term contractual cargo, since the beginning of the current bull run, Carriers have attempted to capitalize on the situation by maximizing their spot market bookings at higher rates. While rates are still fairly high, some Carriers are now adopting a comparatively nuanced approach, keeping long-term profitability in mind, and signing up long term agreements with higher than average contractual rates (which though lesser than the current spot market rates, are still far higher than the average historical contractual rates).
Carriers have also pushed for multi-year contracts, thus locking up customers at those rate levels for a longer period.
In this manner, Carriers have tried to neutralize the revenue impact in case of the eventual cooling of spot market rates and effectively ensured relatively high revenues, over the next few years.
Shippers will feel the impact in the form of higher freight rates vis a vis spot market rates, for the entire duration of the contract.
Source: Marine Insight