What a difference a year can make! This has been an interesting year for the ocean shipping industry. Ocean carriers were mostly profitable at the end of 2017, but that trend eroded quickly in the first half of 2018. And, with fewer carriers now in business—a result of past consolidations—carriers are finally focusing first on profitability instead of on ensuring vessels are full. This smart focus continued to improve the carrier’s financials towards the latter end of 2018. Will this trend continue into 2019 and beyond? Or, yet again, is this just a temporary recovery, as the trend has been since 2008?
As we head into 2019, here are a few things to consider and keep in mind:
Supply and demand
In years past, you could predict that if demand increased, so would rates; if the demand dropped, so would rates, regardless of whether or not it was profitable for the carriers. Today, we have fewer carriers, and they are very quick to withdraw capacity in a more uniform manner to ensure demand remains tight against available capacity. This results in rates that continue to remain high, on average. In 2019, overall capacity is projected to increase by less than 3%, but global trade is predicted to grow around 6%. So, this tells us with some certainty that carriers intend to keep supply tight against demand. The carriers would much rather deploy extra loaders as needed rather than introducing additional service strings. As we get into the contracting period, expect to see higher rates than we saw in 2018. One thing is for sure: having an attractive rate on paper will never guarantee capacity moving forward.
Political, government, trade, and tariff uncertainties
The trade war between China and the United States dominated the news in 2018. We saw tariffs and retaliatory tariffs enacted, leading many importers to ship earlier than normal to avoid paying higher tariffs. While tensions have eased with the 90-day delay, this trade war is far from over, given continued escalations almost weekly. Besides front loading their shipping to avoid tariffs, importers are accelerating supply chain diversification by moving toward Southeast Asia. While this does not solve the problem, their actions definitely show a desire to diversify as much as possible from China. This is critical because of the way service strings today operate from Southeast Asia. While there are direct services from South East Asia’s main base ports, there is still a fair amount that transships. With higher demand from Southeast Asia and no appetite on the part of carriers to add more service strings, the dynamics of how carriers operate their vessels in 2019 and beyond could change. Brexit also looms; as time passes, the complexity seems to increase, and there is already talk of holding a second referendum. However this plays out, it should continue to shape how carriers operate and manage capacity in Europe.
U.S. choke points and last mile
Congestion at the terminals, chassis shortages, driver and drayage capacity shortages, and rail service realignments all continue to challenge the movement of containers beyond the port of arrival.
- Terminal congestion. Year over year, terminals have struggled to cope with incremental volumes. As carriers continue to change alliances, merge, and consolidate, things haven’t gotten any easier. Today, so many individual vested interests exist within a single terminal that it’s almost impossible to avoid issues. This will continue in 2019.
- Chassis shortages. It continues to be a challenge to align chassis with the severe peaks and valleys of demand in the U.S. market. There is really no silver bullet here. We have seen the “grey” chassis pools being implemented in a few locations, but it’s far from a solution. With the escalations in tariff and front loadings, most warehouses continue to struggle with space. As such, some importers are moving toward using ocean containers as mobile storage units. In the U.S., almost all containers are mounted on chassis while they wait to be unloaded. Naturally, you can expect there to be shortages of chassis, given some of the elaborate free time that importers have negotiated and ocean carriers have given. To further complicate things, most ocean carriers have divested their chassis ownership, but some still have half a foot in managing chassis. This continues to complicate procuring, executing, and managing chassis in general.
- Driver and drayage capacity shortages. The Electronic Logging Device (ELD) mandate definitely changed the landscape of last mile deliveries in 2018. Ocean carriers that manage door deliveries as part of their service offering have struggled to execute and honor their pricing commitments. Motor carriers find it difficult to hire truck drivers—and this alone ensures that last mile solutions will continue to be highly priced and coveted.
- Rail service realignment. Rail is the main artery for containers coming inland into the United States, so containers go through their own service rationalization. Watch for rail lines to install Precision Scheduled Railroads (PSR) within their systems. At its core, this is meant to improve customer service, prioritizing delivery of customer shipments on fixed, point-to-point schedules while minimizing in-transit work events. The theory is that customers can better plan for shipment arrivals and departures, which is great, but expect some challenges as it’s put into practice.
Ocean carrier consolidation and investment in third party logistics providers (3PLs)
Most would say we reached the peak of carrier consolidation in 2017. However, we feel consolidations could continue. A few carriers are rumored to be heavy targets of consolidation. When analyzing their capacity and order books, it’s no secret that we will likely see some activity on this by the latter part of 2020. There are also several carriers that are still not within the broader alliance. They will need to evaluate their service strings and loading factors, since functioning as an independent carrier in today’s environment is almost impossible. A few ocean carriers have revisited their strategies on how they intend to approach the markets; it is likely they will widen their offerings by more directly and deliberately investing in internal 3PLs or acquiring 3PLs. I suppose it’s become hard for carriers to ignore the growth 3PLs have had in the last few years. Instead of aligning with 3PLs more effectively and viewing them as an extension of the carrier’s network [most 3PLs are also non-vessel operating common carriers (NVOCC)], their acquisitions and investments in 3PLs could potentially create some friction. Most importers know all too well that 3PL neutrality will serve them better than having an in-house 3PL.
Ocean Shipping Technology
Technology has been evolving naturally through the years, but we have seen it accelerate in 2018. There have been significant investments from private equity groups into technology companies, and service offerings though a platform have accelerated in 2018. Now, both 3PLs and ocean carriers compete in what has primarily been a 3PL space for smaller shippers and importers. While this can be considered a natural progression, don’t forget that almost half of bookings are still manual, and that almost half of invoices could be erroneous. These are basic and fundamental areas of improvement that really have not moved forward, despite advancements in technology.
Overall, we think 2019 will be very different from 2018. We will likely see ocean carriers putting profitability above rankings and volume, which could result in more pricing stability for the carriers and lower decreases in pricing for shippers than in years past. Smaller carriers will likely struggle to compete, which could result in continued consolidation or the need to join an alliance. Front loading and cost of carrying inventories will also be something most importers will be thinking about as the tariff war escalates. And we will have to pay very close attention to how choke points and driver shortages exacerbate supply chain challenges with last mile solutions.
If you have any questions or comments about these trends, connect with an expert today.