The hidden worries of the global container shipping industry
When customers told suppliers that they should raise prices, the industry must have had a serious problem. This scene has repeatedly appeared in the global shipping industry, which is struggling to cope with the imbalance between supply and demand. This imbalance is causing uncertainty and disruption to shipping companies and the businesses that rely on them to ship goods to all parts of the world.
Patrik Berglund, co-founder and CEO of Xeneta, a Norwegian company that tracks container freight, said: “People are urging shipping companies to increase prices to make sure their goods are actually shipped.”
Such requests have become the norm. Recently, at the Trans-Pacific Maritime Conference hosted by the industry publication "Journal of Commerce" in Long Beach, California, Rob Kusciel, Head of Transportation and Logistics at Honeywell, told delegates: " The carrier is setting the price below the cost, which is unsustainable."
According to the Journal of Commerce, Peter Levesque, chief operating officer of Modern Terminals, a Hong Kong-based container terminal operator, said that the current pricing model is "chaotic." The freight rates that shipping companies rely on to maintain their operations have become unprofitable "to the suffocating level."
This does not count as the following fact: According to Xeneta data, the average cost of transporting a 40-foot container from East Asia to the east coast of South America has risen from US$500 to US$3,285 in the past 12 months. Indeed, at the beginning of 2017, there has been a series of developments that should benefit the shipping industry.
According to data from the International Finance Association (IIF), an industry organization, the economies of emerging markets have grown rapidly, which accelerated to 6.4% in January. Economic activity in the United States and other developed markets is picking up, leading to an increase in global capital expenditures, which means that the demand for exports from emerging markets may increase. The Export Managers Index compiled by China Customs rose from 32 a year ago to 41.5 in January this year.
But the rise in container freight rates over the past year has masked extreme price fluctuations. According to Xeneta data, the cost of shipping a 40-foot container (for example) from Shanghai to Santos, Brazil under a short-term contract has experienced dramatic fluctuations in the past year. Some shippers claim that the freight they paid for a container used to be as low as $50 or even $25.
The risk that such a low freight rate brings to shippers is that sometimes, it doesn't seem to be worth the trouble for the carrier to ship the containers-sometimes they really don't care about these containers.
“Imagine a ship entering the Shanghai port,” Xeneta’s Berilund said. “They looked at the containers on the dock and said that this profit is so much, and that profit is only one-third of the former. Low-margin containers Only to be hoisted aboard the ship at the end."
Exacerbating this situation is the industry practice of using non-enforceable contracts: both the shipper and the carrier want to maintain flexibility in the volume of freight, and the inevitable result is that neither party can keep the other party's promise.
In the first 10 years of this century, global trade has grown faster than in any previous period. In order to handle the ever-increasing cargo volume, shipping companies have ordered more and more ships, and the tonnage of ships has become larger and larger. Economies of scale lead to lower freight rates.
But then the global financial crisis broke out, followed by years of uncertainty and the reversal of globalization that many people see as being unfolding. Given the various protectionist commitments made by the Trump administration in the United States, the future of the shipping industry has never been more elusive than it is now.
When globalization is frustrated, shipbuilding activities have reached an unprecedented scale. However, when trade recovered after the global financial crisis, shipping companies once again placed large orders. Today, the global shipping industry is experiencing an unprecedented excess of capacity.
VesselsValue, a company that monitors the value of global ships, said that currently, the valuation of 2028 container ships is at or below their value as scrap, and another 3242 container ships worldwide are valued higher than scrap. In terms of capacity, the capacity of 7.3 million 20-foot standard containers (equivalent to nearly one-third of the global container fleet capacity) is at or below the scrap price, and 16.2 million standard containers are estimated to be more than scrap.
This situation may get worse. Alphaliner, a company that monitors ship construction, said that the total global capacity will increase by an average of 4% per year in 2017 and 2018, which does not count as the existing 7% of idle capacity. The biggest problem is the giant freighter: more than 150 new ships that can carry more than 10,000 standard containers at a time will be delivered before the end of next year.
What this means for global shipyards is another matter. Where possible, large shipping companies are canceling orders. In order to keep container freight rates within a reasonable range, they have also cancelled sailing schedules. Berylund said that during this year's Chinese New Year, when the volume of cargo dropped sharply, shipping companies operating liners from China to Northern Europe cut as much as 43% of their capacity.
Paying the realistic freight again will relieve some shippers. This means that they can be more certain that their goods will be delivered to the destination.
"For many shippers, the freight has dropped to such a low level that it makes it (for total cost) insignificant," Berylund said, "but then they start to experience supply chain disruption. If your cargo is trapped At sea (for a small company this may mean all inventory) is a crisis. Suddenly, ocean freight has become extremely important, and this is when prices rise again."
The biggest recent destructive incident was the bankruptcy of South Korea’s Hanjin Shipping last year. Many of the company’s ships were stranded at sea for several months. This is reflected in the soaring freight rates from China to Northern Europe in October last year, which lasted longer than most routes.
But the impact of the Hanjin incident is not over yet. Some of the company's capacity is returning to the market. Short-term freight rates have started to fall again. Berglund said that in view of the huge uncertainty, the latest round of negotiations on the Asia-Northern Europe route (usually held at the end of each year) has been abandoned by both parties.
"From the perspective of shipping companies that have suffered huge losses in the past few years, this makes sense," he said. "From the shipper's perspective, this is a huge risk, but considering the uncertainty, I can understand it."
Both parties will pay attention to the drop in short-term freight rates as shown in Exhibit 3. If history is any guide, it seems to indicate that long-term freight rates will fall again. Volatility, uncertainty and disruption may return soon.