Weathering the storm

With the shipping industry facing significant headwinds there is a need to reassess the future prospects of the industry. Lionel Alva...

Nearly 90 percent of the world trade is carried out via shipping and ocean freight constitutes a significant amount of this trade. According to a monthly survey conducted by investment firm Stifel, Nicolaus & Co and United Kingdom research firm Transport Intelligence, more than 80 percent of shippers and freight forwarders operating on trade lanes linking Europe with Asia and the United States expect a continued migration away from air freight and toward ocean despite significant headwinds that the shipping industry is facing. This shift is driven by cost-conscious shippers moving to lower-cost ocean services from traditional airport-to-airport airfreight, the survey highlighted. The prevailing sentiment can be seen in the erratic flow of airfreight volumes. European air imports from Asia fell 6.3 percent from October levels, and imports from the United States declined 5.5 percent over that same period. Asked to predict air import volumes into Europe for six months from now, respondents expected declines, though not as severe as November’s figures. This preference for ocean freight has led to increasing containerisation levels and bigger ships. The influx of massive ships is adding to the overcapacity on the world’s busiest trade lanes, particularly the benchmark Asia-to-Europe route. The World Trade Organisation says global trade has averaged only 2.4 percent annual growth from 2012 to 2014, and the WTO is forecasting only modest 3.3 percent expansion this year. In the Indian context, the government has been taking steps to provide an impetus to the shipping industry. “Because we are not purely looking at exports, we are still a domestic consumption based economy. Thus our coastal shipping will play a crucial role in positive economic sentiments we have seen across India’s market. With proactive measures by the central government to boost economic pace as well as upcoming implementation of GST, this will drive our market, let development into a faster gear, thus benefiting the overall shipping and logistics industry,” says Ashok Shrivastava, chief executive officer, Allcargo Shipping. To enhance the country’s coastal connectivity and improve domestic ports, the government has initiated the Sagarmala project which is India’s new strategic, customer oriented ports initiative. Deepak Shetty, IRS director general shipping, government of India explains, “The much needed red-tapism has been removed in the shipping sector, enabling the stakeholders to get a one-time license and they will not have to run to the DG office any more. Out of 67 rules, 14 have been repealed, thus making the trade smoother.” Nevertheless, India is still susceptible to global headwinds as it seeks to increase exports and improve the status of its ports.

Reality check However, the maritime freight industry is also plagued with a unique set of problems with the container-shipping industry being highly unprofitable in the past few years. To make matters worse, earnings have been exceptionally volatile. And there are various factors that have led to this dire situation in the shipping industry. “The trigger point for all of this started when carriers brought in large capacity ships, mostly plying on the Asia to Europe trade lane. Although this increased the surplus capacity, the thought behind this move was improved efficiency i.e. reduced slot costs with better fuel efficient and low maintenance new generation ships,” observes Sandeep Nair, senior director, Ocean Freight, India, DHL Global Forwarding. Drewry analysts also highlight that the rush to order the biggest containerships might pay off in the long run. However, at present, that gamble has backfired and carriers are faced with overcapacity in Asia-Europe, making it very difficult to see how rates will become sustainable. Nair adds, “Now, with consumption coupled with buying power in Europe declining, this has impacted the trade volumes from Asia to Europe and all of a sudden the ‘efficient’ ships did not seem all that efficient, although this has nothing to do with the ships themselves.” As the global economy takes a hit, it has led to declining volumes in ocean freight and shippers suddenly find themselves caught in a precarious situation with little to no respite on the horizon. Various studies were conducted by Drewry and Alphaliner on the present situation. They found that freight rates are on continuous pressure due to large vessel deliveries. “Globally the European economic pressure and the recent slowdown trend observed in world’s largest market China are few of the reasons for the weakness in the shipping trade. This was compounded with the already pressured oil market. Thus overall in the last few quarters every industry across the globe is going through headwinds,” highlights Shrivastava. Lack of demand and oversupply has been one of the biggest problems in the past few years. The three largest container carriers — Maersk, MSC and CMA CGM — have on order capacity equal to 15.6 percent of their current combined fleet; the next 18 largest carriers have orders equal to 19.8 percent of their existing fleet. “The problem with ocean freight is that the demand is reducing. If you take the Chinese situation, the market there and the problems that they are having. One of the key markets like China is demanding very low rates. Rates have suffered as a result of the drop off in the market and the ports and shipping vessels have had to adjust rates accordingly,” avers Ken Whelan, chief executive, Angre Port. Given that the entire global trade and market has reduced, shippers have had to reevaluate the terms as well as schedules and consequently this has in less revenues, ship sharing among other measures to survive in a trying market. Whelan adds, “Markets have dropped, there is over tonnage, this excess tonnage is further bringing the prices down,. The freight market is so tight and it is extremely difficult to survive in this market." Much of the situation is self-inflicted as the industry witnessed a sporadic rise in demand and started building capacity which is now mostly unneeded. Since ordering ships that take years to build is akin to that of a gamble. The Maersk Group – and especially Maersk Line – was also severely affected by continued low economic growth and significant market imbalances. Maersk Line posted a third quarter profit of $264m, down from $685m a year earlier, as freight rates slumped to record lows. That pushed the return on invested capital from container shipping to 5.2 percent against 13.5 percent in the third quarter of 2014. The deterioration came as no surprise. Maersk has already ordered 27 vessels this year, including 11 Triple-E behemoths, which can carry in excess of 19,000 containers. Global container demand is expected to have grown by 0-1 percent, whereas the global container fleet grew by almost nine percent for the world's largest container line. Furthermore, container freight rates declined significantly across all trades except North America, and especially Maersk Line’s key Europe trades were impacted severely. Maersk Line will cut 4,000 jobs from its land-based staff of 23,000. It is also canceling options to buy six Triple-E vessels, the world’s largest container ships, to cope with the deepest market slump in the industry. Maersk said it would also push back plans to purchase eight slightly smaller vessels. “The shipping industry has been facing tough times since 2008 and prior to that there were always the peaks and troughs of this cyclical industry. Traditionally the high and low periods were longer which allowed shipping companies time to plan their objectives and strategies. Now the cyclical ups and downs are unpredictable and more frequent, which makes it very difficult to plan and take a position,” says Sanjay Shesh, managing director, Crowley Accord Ship Management. Presently, the bleak scenario has been caused by trade’s spotty recovery from the worldwide economic crisis and increased efforts by corporate clients to take up austerity measures. Freight rate volatility is expected to continue to be most noticeable on the westbound Asia-Europe trade, where a majority of cargo is moving on short term forwarder contracts (i.e. the spot market). It is expected that there will be less volatility on the eastbound transpacific where the majority of cargo still moves on longer-term BCO(Beneficial Cargo Owner) contracts negotiated directly with the carriers. Shrivastava asserts,“Market & economic uncertainty will always play an important role in strategic decision making irrespective of global opportunity. Thus carriers need to focus on existing business as well as plan for upcoming challenges and opportunities to leverage their potential. Thus focus on consolidation and efficiency now to be better prepared for the coming growth.” Thus, in recent times, carriers have become more disciplined with their capacity deployment at a trade route level. Throughout much of the year, load factors remained relatively high on the main headhaul east-west trades, it is expected that this practice shall continue. Nair highlights, “As a corrective (more a force majeure actually) step, carriers had no choice but to withdraw capacity and this did give them the option to levy GRIs (general rate increase) on the Asia to Europe trade lane, however even this was short lived. To add to this, China startedshowing signs of recession. Unfortunately today, the situation on freight levels from Asia to Europe resembles a stock market, where prices rise and fall, almost every other week (sometimes even daily).” However, with a large number of megaships due to enter this year, carriers will be challenged to maintain this discipline and it is expected that the North-South trades (those serving Latin America, Africa and Oceania) to be impacted by further cascading of vessel capacity and pressure on freight rates. This is an outcome of turbulent economic conditions world -over and the shipping industry’s present woes reflect this situation. “As the international trade primarily moves by sea, any economic swing has deeper impact on maritime sector. The economic crisis led to record decline in sea freight rates due to lower demand for transportation. This has, in turn, affected the ship building, repair and maintenance sectors,” says Unmesh Abhyankar, CEO, Mundra Port. However, despite the gloomy scenario presented, the drop in oil prices has provided some measure of respite to ship-owners and shippers. Shesh observes, “One major benefit has been the drop in oil prices, which has overall reduced the cost of ship operations. The ship-management business is not insulated from shipping markets as regular revenue streams are very important for ship managers to manage vessels well and in some cases we suffer along with the owners of ships who are not making the right margins." These problems are real and significant and are difficult to address by a singular organisation. Even so, shipping companies cannot give up just yet and deem the present situation as being a finality. Shesh adds, “There is no perfect strategy or direct solution to the current market volatility and it is very difficult for any shipper to take a firm position. The best way forward is to maintain good awareness of changes in the market and cash in on short-term opportunities.” Lurking within these issues (and driving them to an extent) is another set of challenges that shipping lines could assess. Since, across the enterprise in commercial, operations and network and fleet activities, there are opportunities present for shipping lines to improve performance. For instance in sales, carriers often confuse their costs with the value received by customers and fail to charge a premium for services for which shippers will pay more. In operations, many lines treat bunker as just another cost of doing business. In fact, fuel presents many opportunities, not just in procurement, but also in consumption. In network design, more than a few shipping companies use outmoded approaches to design their routes; new and more powerful systems use algorithms to make better, more effective decisions about networks.