Maritime Transport is in Crisis

With the spread of online shopping, the process of ordering a product, filling in our data and clicking ‘send’ is becoming more and more ordinary. Now, as Christmas is coming – Christmas shopping and special offers can never start too early – companies coordinating shipping have already been calculating which products will arrive from which locations and on which cargo ships. In reality, however, it can be seen since summer that shipping companies, and even shipping as such, are in crisis. As a result of various asymmetries in trade, a lot of containers remain empty, but the freight rate still must be paid. Prices plunge and the weakest collapse.

The Weak Fail

The difficulties of the shipping industry, which most recently has culminated in the crisis of South Korean Hanjin Shipping, demonstrate the mismatch of ambitions and in the industry. This was supposed to be the age of the ultra-large container ship, piled with thousands of steel boxes holding clothing, toys and Apple iPhone 7s; but the world turns out to need smaller and fewer ships.1

On 31st August, 2016, 66 ships and their cargo of a value of $14.5 billion were left stranded at sea, due to the collapse of Hanjin Shipping, the world’s seventh-largest shipping company. Several ports refuse to let them dock because they are afraid that they will not pay for unloading; and distributors, and through them, customers, are worried about not receiving the products ordered in the run up to the Christmas season. Negotiations between the company, the government of South Korea and the ports are ongoing to collect necessary financial resources to ensure at least unloading.

However, it may serve as something of a warning for the whole industry that President Park Geun-hye said, ‘ it is lazy thinking that the government will have no choice but to help shipping lines if they run into problems.’ The situation is causing a serious dilemma, since the government cannot let shipping line giants such as Hanjin and alike and shipbuilders unable to compete with Chinese competitors go bankrupt and their workers become unemployed. However, the companies’ practice to manage their receivables in such a negligent and often irresponsible manner and to expect the state to get them out of trouble must be ended. Hanjin is not the only company having difficulties. Several Japanese companies, including Mitsui OSK Lines, NYK Line and Kawasaki Kisen Kasiha are encouraged by investors to merge. The container-shipping business is set to lose as much as $10 billion this year, according to global shipping consultancy Drewry.

Up and Down

What has contributed to the emergence of the crisis?

  • it was the first time in 2015 that global GDP had grown more rapidly than containerized trade (which amounts to 2/3 of seaborne trade), with the exception of the 2009 crisis;
  • ships orders and their loading capacities are unable to flexibly fit changing demands;
  • with the restructuring of Chinese economy, its raw material take-up capacity has decreased, which reduces the number of orders for new ships as well as the demand for products to be shipped;
  • significant overcapacities have been created in past years;
  • high levels of indebtedness – banks tend to wait and see whether shipping companies can survive until the shipping market recovers;
  • in addition, there are a lot of so-called “zombie ships”, which can just about repay interest on their debts, but have no hope of repaying the capital;
  • companies are reluctant to remove surplus capacities, ships, containers from the market;
  • in the meantime, the values of ships are also plummeting;
  • the commitment to the liberalization of seaborne trade is decreasing;
  • and multinational companies try to locate their production and their factories as close as possible to local markets.

Since the establishment of modern container shipping in 1956, the industry has mostly grown, apart from some downturns that lasted only for a year or two. Companies in cyclical industries, the Financial Times claims, invest heavily near the peak of the cycle, trying to achieve as high profits as possible and beat competitors. Then a downturn arrives at the same time as their new capacity. And in the long term it does severe harm to even larger companies as well as smaller and weaker ones. Now we have reached such a downturn of a cycle. By early 2016, Baltic Dry Index, the index of the global shipping industry, hit its lowest level since records began in 1985, and considerable increase is not expected for quite a while.

One of the reasons for the situation that has evolved and now is aggravating into crisis is the deceleration of growth in global trade, and the slowing of the extent of globalization, to which the restructuring of the Chinese economy and the political climate around multilateral trade deals have contributed. In addition, shipping companies grew faster than even buoyant globalisation justified. The average size of container ships has increased by 90 per cent in the past two decades, and total fleet capacity in 2015 was four times larger than that of 2000. Shipbuilding has accelerated since 2007, becoming “completely disconnected” from levels of demand, according to an OECD study. More and larger ships, combined with weak demand, have created overcapacity of up to 30 per cent.

 

Overcapacities have sent prices plunging, which has doubled with a drop in the values of vessels, thus even their demolition cannot generate such income that would ensure the repayment of debts. For example, a five-year old Capesize vessel – so-called because they are too large for the Panama Canal and have to sail round Cape Horn –  was sold for $19 million USD in early 2016, 40 percent below the normal listing price for a vessel that age of around $33 million USD. Nevertheless, preventive servicing might increase the life span of vessels, decrease their maintenance costs and make shipping more reliable.  Due to oversupply, the effects of the crisis reach beyond seaborne trade: port terminal operators, railroads, trucking companies will also lose on revenues if, as Hanjin did, other companies go bankrupt and cannot get their cargo into ports.

WTO’s statistical outlook, published in April, warned of the situation. According to the report, a growth in the volume of world trade was expected to remain subdued in 2016 as uncertainties weigh on global demand. Growth in 2016 was expected to be at 2.8%, unchanged from the 2.8% increase registered in 2015. Global trade growth should rise to 3.6% in 2017. Reasons include a sharper than expected slowing of the Chinese economy, worsening financial market volatility, and exposure of countries with large foreign debts to sharp exchange rate movements.  Although the volume of trade is still registering positive growth, this is the fifth consecutive year of trade growth below 3% (in fact, world trade has not managed to recover since the 2008 crisis). While the volume of global trade is growing, its value has fallen because of shifting exchange rates and falls in commodity prices.

Maritime transport handles over 80 per cent of the volume of global trade; obviously, seaborne trade is still key to the exchange of goods and globalization. Demand for seaborne trade, however, is fundamentally affected by global economic growth, and its permanently low level has certainly an adverse effect on the industry. OECD’s Interim Economic Outlook, published in September 2016, claims that these below-trend figures indicate a breakdown in trade-driven global processes.

According to OECD’s another economic policy paper, issued around the same time, the global trade slowdown has cyclical and structural components. Pre-crisis growth in the volume of trade was induced by the global liberalization of trade policies, on the one hand, multilateral deals (e.g. NAFTA and the unification of the EU as a single market in the 1990s). Another driving force was the growing importance of global value chains, where production was divided between various countries, increasing global trade, especially the trade of intermediate goods.  Liberalisation has slowed down after 2000, but the expansion of global value chains still accelerated world trade. Since the financial crisis the contribution to world trade from GVCs and trade liberalisation has plateaued and with creeping protectionism from a myriad of small measures has gone into reverse (Figure 5.). The document concludes that substantial policy action is required to return to former growth rates.

Where to Go?

Zvi Schreiber, CEO of online logistics market platform Freightos, outlined three scenarios which may help the industry to overcome the crisis:

  1. the world economy should get back into growth to make more orders and catch up with capacity;
  2. more companies should collapse;
  3. prices should be consolidated by mergers in the shipping line industry.

This latter option has been confirmed by Philip Damas, head of Drewry Supply Chain Advisors, highlighting that due to weaker competition companies will not depress prices to the extreme, and will also avoid financially hazardous routes. Although it means pushing shipping rates up in the long term, consumers do not benefit from it; and the industry should not go back to a situation of cartels and price fixing. A balance between the two should be sought.

Maersk was the first to increase the size of vessels, which has resulted in the failure of smaller companies with less capital and less opportunities to diversify resources, but it has also put Maersk itself into a more difficult position. The whole industry is forced to cut capacity by reducing the number of shipping companies through their mergers, and cutting the number of vessels as well.  Ships should not be kept at anchor, but should be broken up, “even big, expensive ones”.

Chinese companies, joining the competition with high ambitions earlier, as well as others, have chosen a fourth tactic. China Shipping Container and China Cosco lost more than $857 million USD in their total market value from 2015. A re-organisation of the groups owning these companies have been attempted, extending efforts to create smaller and globally more competitive businesses. The plan comes as other shipping companies pursue adverse strategies, and explore mergers and acquisitions to obtain greater control and capital for survival.

Modernisation Is Always A Good Option

Another possible option would be to equip remaining ships with more developed technologies. Currently used interfaces are often outdated, there is no adequate data about the location of the ship, or the product being shipped, or whether the valves are closed. It makes adequate cost assessment extremely difficult. And calculations tagged as “just an estimate” are not very encouraging for investors.

But there are solutions for such problems, processes can be greatly optimized with the help of smart technologies. Danish Maersk is a flagship in this respect. With the help of their unique system, introduced in 2016, each of their containers can be monitored and logistics can be managed remotely (this is the so-called Remote Container Management – RCM). Earlier Maersk spent about USD 200 million every year on physical inspections and continuous monitoring of its containers (and their contents), but with the RCM system, instead of people sensors monitor the journey of goods (by sending real-time data), rendering the process much more reliable and also considerably more cost-effective. The system further optimizes empty container flows, develops more accurate container supply and demand forecasts – therefore processes will be more predictable.

Top 10 International Container Shipping Companies

(based on data from Alphaliner, 2016)

  1. A.P.Moller–Maersk Group

Founded: 1904. HQ: Copenhagen, Denmark

Capacity (twenty-foot equivalent units, TEU): 3,178,475

Ships: 615. Employees: 89,000

Revenue: $40.3 Billion (USD)

  1. Mediterranean Shipping Company S.A. (MSC)

Founded: 1970. HQ: Geneva, Switzerland

Capacity (TEU): 2,799,863

Ships:490. Employees: 24,000

Revenue: $28.2 Billion (USD)

  1. CMA CGM Group

Founded: 1978. HQ: Marseille, France

Capacity (TEU): 2,168,914.

Ships: 457. Employees: 22,000

Revenue: $15.7 Billion (USD)

  1. China Ocean Shipping (Group)

Company (COSCO)

Founded: 1961. HQ: Beijing, China

Capacity (TEU): 1,555,520

Ships: 279. Employees: 130,000

Revenue: $10.2 billion USD

  1. Evergreen Marine

Founded: 1968. HQ: Taoyuan City, Taiwan

Capacity (TEU): 973,685

Ships: 187. Employees: 3,389

Revenue: $4.6 billion USD

  1. Hapag-Lloyd

Founded: 1847. HQ: Hamburg, Germany

Capacity (TEU): 932,239

Ships: 165. Employees: 9,500

Revenue: $12 billion USD

  1. Hamburg Süd Group

Founded: 1871. HQ: Hamburg, Germany

Capacity (TEU): 597 886

Ships: 115. . Employees: 5,360

Revenue: $6.9 billion USD

  1. Hanjin Shipping

Founded: 1977. HQ: Seoul, South Korea

Capacity (TEU): 621,243

Ships: 48. Employees: 5,800.

Revenue: $8.3 billion (USD)

  1. Orient Overseas Container Line

(OOCL)

Founded: 1969. HQ: Hong Kong

Capacity (TEU): 576,270

Ships: 98. Employees: unknown

Revenue: unknown

  1. United Arab Shipping Company

(UAS C)

Founded: 1976. HQ: Dubai, U.A.E.

Capacity (TEU): 544,680

Ships: 57 Employees: unknown

Revenue: unknown

 

However, several other companies are engaged in monitoring containers. The TRAXENS system, developed and applied by French-based CMA CGM group, collects real-time data throughout the container’s transport: location, temperature, humidity level, vibrations, impacts, attempted burglary, customs clearance status and more. In addition to monitoring, they can remotely control and adjust, for example, the temperature of refrigerate containers. ShipX, a company specialising in LTL freight, attempts to make as accurate calculations as possible, Hong Kong-based Cargo Smart’s software promises to improve logistics planning and reduce costs, T-Systems improves the synchronization of dynamic logistics processes; thus, on the basis of developments, there is great demand for services of this kind.

Xchange

Furthermore, xChange, having recognized the problem of losing considerable amounts of revenue due to empty containers, provides carriers with interchange opportunities.  To help industry players collaborate, the Boston Consulting Group (serving as a neutral, global clearinghouse for information about container demand and availability) developed a global interchange marketplace for empty containers in 2014, which was officially launched in November, 2015. BCG calculates average savings amount to approximately $200 to $400 per interchanged container, corresponding to potential annual savings of $350 million to $700 million, and scaling up this impact to the top 100 carriers would promote annual savings of up to $4.5 billion. The data collected by the company indicate that there are significant needs as well as opportunities to interchange containers in all regions.

To fully capture the benefits of xChange, cross-carrier collaboration is required. Carriers must be willing to adopt advanced repositioning strategies, and to pursue interchanges with other marketplace participants, without prejudice or subjective preferences and roles, responsibilities and competences need to be clear.  Each carrier’s organization must be committed to a proactive attitude, even prevailing over the interests of the sales department, and to adopting a common set of shipping standards. In addition, avoiding all movements of empty containers for carrier-specific reasons would improve the environmental footprint: it would reduce carbon dioxide emissions by more than 6 million tons annually. The emissions reductions would also be significant for other greenhouse gases.

The Northern Sea Route

As a result of global warming, new shipping lanes may open in the Arctic. In 2012, Russian LNG Carrier “Ob River”, demonstrated that the Northern Sea Route is a commercially viable alternative to transiting the Suez Canal. This new route from Northern Europe to North East Asia cuts the maritime distance by 40%, drastically reducing the environmental footprint of the vessels as well as providing economic benefits in terms of fuel consumption.

 

According to some analysts, the race for access to the route (and now accessible energy resources) may even turn the Arctic into a battlefield, but it also opens a plethora of new possibilities for maritime transport. For example, more Korean companies, including Pan Ocean and Heung-A Shipping, would be transporting plant facilities to Russia and Kazakhstan via the Northern Sea Route from 2016, using ice- resistance vessels instead of ice-breakers.

However, this route is not likely to become the saviour of the shipping industry: statistics from the Northern Sea Route Information Office showed that in 2015 18 ships crossed the route, significantly down from 53 in 2014 and 71 in 2013. (Nevertheless, it should be also noted that total cargo volume expressed in tons increased and reached 5.45 million tons in 2015, a significant increase in comparison with 4.0 million tons in 2014 and 3.9 tons in 2013). The decline in the number of such voyages has been attributed to a general setback in seaborne trade and a plummeting of oil and gas prices.  In addition, the majority of the ships that transited the Northern Sea Route are owned by Russian and European shipping companies. Apart from CJ Korea Express, the only other Asian company to make a voyage through the route in 2015 was Cosco Shipping. The vessels crossing this route are mainly owned by Russia or European countries; as for Asian ones, only CJ Korea Express and Cosco Shipping used the Northern Sea Route in 2015. To adjust this imbalance, a better knowledge of the area and solutions to the above-mentioned overcapacity and technological problems are required.

According to Jonathan Roach, container market analyst at Braemar ACM Shipbroking, the shipping industry has taken a double hit: in addition to the painfully slow growth of global trade, a chronic overcapacity is becoming permanent. And this does not seem to change soon, “especially because a lot of new ships will be delivered in the near term”. The expansion and opening of the Panama Canal will also put further pressure on shipping companies to deploy as many and even as old and as large vessels as possible, to exploit the new opportunities of the canal.

However, it is a question what new competition the opening of the Northern Sea Route, or One Belt, One Road, and its speed railway network initiated and continuously developed by China, will create, and whether it generates adequate motivation for carriers to actually start to remove overcapacities.

References

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Churchill, John: Smart containers listen and talk, 2016.02.10. http://www.maersk.com/en/the-maersk-group/about-us/publications/group-annual-magazine/2015/smart-containers-listen-and-talk

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