Wednesday, September 2, 2015

MARITIME FINANCIAL TSUNAMI--Shippers


This is the third, and final, part of our discussion of the pending Maritime Financial Tsunami.  Shippers are, for this discussion, the direct buyers of ocean transport.  They use service contracts, spot market rates, relationships with carriers, and other methods to get rates for shipments.

There are two buyer subsets—BCOs and OTIs.   They are different and have different agendas.  BCOs are Beneficial Cargo Owners.  The other subset, OTI’s, is Ocean Transport Intermediaries such as freight forwarders, 3PLs, or other similar providers of logistics services. 

Beneficial Cargo Owners are supposed to buy services that align with their supply chains.  They should segment their supply chain and utilize the carrier whose service best matches each segment. 

Service however does not seem to be a primary goal for many BCOs—  

  • Based on Drewry reports, carrier on-time service and reliability in the major trade lanes are not good. That opens up the question as to what shippers are buying.
  •  Supply chain executives are under pressure not to take price increases.  As a result, they utilize poor service carriers which, in turn, increases the amount of inventory each company must carry to buffer for the unreliability.  Interestingly, many supply chain execs are faced with contradictory directives as to not taking price increases and not increasing inventories.
  • With carrier Alliances, a firm can contract with a good service carrier—but then be forced to use bad service carriers that are in an alliance.  And each alliance has both good service and bad service container lines.

Smaller intermediaries are rate shoppers.  Service is often a secondary issue but having space from multiple service providers has proven to be a valued option for their customers. There are large OTIs who play both sides, lower rate AND guaranteed space, but it is a fragmented industry with many participants.

What will these two buyer groups do when--

  • the tsunami hits and perhaps as many as five container lines go out of business; 
  • then for the remaining carriers, there will be less reason to push rates lower because of  excess ship capacity and battles for market share;  and,
  •  with alliances broken because of lines disappearing and not all ports capable of handling mega ships, there could be different ports  for export and import supply chains, which impacts supply chain costs and performance?

Shippers have essentially stood by while the tsunami was formed.  They enjoyed the low rates that were part of the tsunami’s formation.  They played no statesman role to bring resolution and to mitigate what was happening. They took the short term benefits vs potential the long term negative impact.

So what do the two shipper groups do when a major carrier or carriers go out of business or even just out of a trade? The obvious is that there will be fewer carriers to choose from. On the assumption that the carrier going out was chosen because of lowest rates, then the shipper goes to the next lowest or shops for rates. If other reasons, then look for another carrier in the same Alliance using virtually the same service.  

But what if over time, a group of carriers leave? Gone are the days when someone can cheaply charter enough ships to give them a service, lease containers, get agents, and be in business.

So now shippers will wind up with fewer carriers, with potentially less capacity. The capacity situation isn’t likely to be a problem for long, remaining carriers will adjust fleet sizes to the markets. There will simply be fewer carriers. Will there be fewer Alliances with fewer carriers? Possibly? But carriers as of now see the benefits of Alliances the biggest being that alone, only two or three carriers could provide global services because of fleet size and make-up.

What happens to rates? Rates in ocean transportation are very much a reflection of the markets and there is no reason to assume that this will change. Supply/demand ratios will win the day. In tight trades, rates will move higher; in oversupplied trades they will fall.  All this will have impact on both shipper groups. BCOs will have fewer choices, and maybe not fast, reliable transit options.  That creates supply chain operations problems and increases buffer inventories to compensate for the service uncertainties.  OTIs and BCOs that are rate shoppers face a new market reality with higher rates. The happy days of cheap rates is over.  This will create a squeeze effect on their businesses—and put some in jeopardy.  This includes BCOs who used low rates to mask supply chain inefficiencies.  The other question will be how many OTIs survive.

One last thought on this; in 1980 the Staggers Rail Act was enacted and at the time there were more than 15 Class 1 railroads in the US. Competition was abundant.  Over time, rail consolidation occurred and today there are 4 to 5 viable Class 1 railroads, negotiations became more difficult, shippers have to find new ways to service certain locations because of abandonment and curtailing of service. Now many large shippers who supported deregulation are calling for more regulations to be put onto the rail industry when it comes to rates and services.

Then translate the rail situation to having say ten container carriers who control 90% of the global fleet and carry 90% of the global trades. Might the shippers’ world be different? Might their view of   competition be different?

The pending Maritime Financial Tsunami will start with the container lines and domino across the ports and shippers.  There will be chaos. The greater the number of carriers that go under or are merged, the greater the chaos.  The end result will be a new paradigm of how shippers and ocean transport providers deal with each other.