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by Bill Smith – Vice President, Business Development & Sales
(Appeared in the 2017 Hampton Roads MARITIME & INTERNATIONAL TRADE Guide)

The ocean container shipping sector has seen better days. Low freight rates and lackluster demand resulted in approximately $5 billion in losses for the top 20 container lines in the last year, according to the Wall Street Journal.

Last year saw the collapse of one of the largest ocean carriers, Hanjin Shipping, which was a wakeup call for an industry that has been plagued by recurring themes of record losses, cutthroat competition and overcapacity. Will 2017 be a watershed year, one in which the ocean carriers stand on more stable footing and turn the corner toward profitability? Shippers agree that a healthy ocean shipping sector is vital for international trade and today’s global supply chains. But the jury remains out on whether the ocean lines will be able to right the ship, at least in the short term.

I recently attended the Trans-Pacific Maritime (TPM) conference in Long Beach, Calif. This annual gathering of ocean carrier executives, major shippers, various logistics industry representatives (freight forwarders and brokers, intermediaries, etc.) and trade media provides a kickoff forum for the annual freight contracting cycle in the Trans-Pacific. And while TPM has been on my agenda for the past 10 years, never have I been so eager to consider various presentations, panel discussions and meetings/networking opportunities on the latest factors affecting our industry. Topics such as new carrier alliances, industry consolidation, financial risk and potential changes to trade policy are weighing on the minds of transportation decision makers, so conference attendees were engaged and keen to learn the latest.

On the topic of capacity, I consider the ocean shipping research firm Alphaliner to be my true north. The firm estimates total global fleet capacity will grow by 4 percent per year (on average) in 2017 and 2018. And while that may sound modest, this comes on top of current idle capacity of 7 percent. Over 150 ships of the 10,000 TEUs to 22,000 TEUs (20-foot equivalent units) capacity are expected to be delivered in the next two years, according to Alphaliner.

Many new ship deliveries have been deferred in previous years due to insufficient demand, but the lines cannot postpone their deployment any longer. New ship deliveries outstrip demand growth by a factor of 2:1. And while ocean carriers are taking measures to counter this imbalance by scrapping older vessels, idling ships and laying up service strings during the slack season, it’s still not enough to stem the tide.

Alphaliner reported that 1.5 million TEUs of new tonnage is expected in 2017 compared to 750,000 TEUs worth of planned scrapping. The overcapacity situation is more acute on some trade lanes with the Far East to U.S. West Coast and Europe being the most problematic. The Asia to U.S. East Coast trade will also see a capacity increase but on a smaller scale. By some estimates it’ll take several years for this capacity hangover to work through the system with Alphaliner pointing to 2019 as the year when a supply/demand balance is reached.

This glut of tonnage led to unhealthy ocean freight rate levels in 2016, and the industry suffered the consequences. These financial losses came despite a carrier alliance strategy, which promised to save billions on annual operating costs by sharing vessel space, equipment, terminal facilities and marketing resources. Instead, the alliances have further exacerbated the ongoing liner price war, which dates back to 2011 when the first mega ships (those capable of transporting more than 10,000 TEUs) were introduced. Now shippers are sorting through new alliance structures, which take effect April 2017, and include the 2M+H (Maersk, MSC, Hyundai), Ocean Alliance (CMA, Cosco, Evergreen, OOCL) and The Alliance (Hapag-Lloyd, K-Line, MOL, NYK, Yang Ming). Not to mention a few independents (Zim, PIL, WanHai, SM Line) that always make things interesting.

Add to this the importance of shippers conducting financial risk assessments and due diligence on carriers in the wake of Hanjin’s demise. And the complexity of ongoing industry consolidation, such as proposed mergers between the three Japanese carriers (MOL, NYK & K-Line) and another between Hapag-Lloyd and UASC, and you’ve got an environment where shippers have a tremendous number of variables to consider this ocean contracting season.

So what are shippers to do? I’d say the British motivational saying, “keep calm and carry on,” applies here. Logistics companies should stay abreast of such developments, to better serve the shipping community and help customers navigate industry dynamics. The portfolio strategy is a proven way to manage risk in investing, and the same principles apply to the ocean shipping industry. Having a balanced approach, with at least one stable, well-qualified carrier in each alliance, is prudent.

Shippers have greater transparency than ever into spot-rate levels, which can change dramatically over the course of the year. Best-in-class shippers build flexibility into their logistics strategy, so they have different options to execute, according to changing market conditions. In this way they optimize both service levels and their transportation dollars.

Logistics providers should help shippers achieve supply chain stability and consistency, despite the erratic nature of the ocean shipping industry. Let’s hope the maritime transportation sector finds smoother seas ahead.

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