Looking Out for the Rising Tide: Measured Growth a Good Sign for Struggling Ocean Freight
Growth for the fourth consecutive month, as recorded in the Index for Sea Freight, offers some hope—small though it is—that the struggling ocean freight industry can overcome the current capacity crisis that it has been troubled by for the past few years, and brought it to the brink this year. The growth alone cannot reverse the problem however, as there is still much to be done by shippers and ports if they truly hope to see a reversal.
The ocean freight industry found itself in this precarious state thanks to a crisis that resulted from their having built too many large, fuel-efficient container ships in the last decade, as a way to meet the growing demand for consumer goods in China, as well as rising gas prices. The hit that the global economy took a few years later (including the slowdown of the Chinese market) and its subsequent sluggish recovery, coupled with a sharp drop in the price of gas, has resulted in there being an overabundance of these massive container ships, without the necessary cargo needed to fill them.
Things took a turn for the worse this past summer, when South Korean shipping giant Hanjin (the 4th largest ocean freight shipper in the world) declared bankruptcy. They saw several of their ships seized or stranded off ports for weeks, causing a huge disruption of the supply chain just as retailers were gearing up for the holiday shopping season. Although the money to pay the docking and unloading fees was eventually scrounged together, Hanjin, as well as everyone else in the ocean freight industry, is still waiting to see if the South Korean government will bail out the company. Should they choose not to, industry insiders expect to see a 51% increase in spot rate for similarly sized containers traveling from Asia to the United States. This could result in even more shippers switching to air freight to move their cargo.
The worst-case scenario is that if Hanjin falls, it will start a domino effect that will see other large shipping companies go down with it. Shrinking profit margins have seen several high profile shakeups throughout the industry this year, including all manner of mergers, acquisitions, partnerships and breakups.
CMA CGMSA (the 3rd largest container shipping company in the world) acquired Singapore’s Neptune Orient, while China Ocean Shipping Group and China Shipping Group were merged into China Cosco Shipping Corp. by their government. Hapag-Lloyd bought their rival, Compaña Sudamericana de Vapores’ container business in 2014, while announcing a merger this past June with United Arab Shipping Co., now making them the world’s 5th largest shipping company. The 112-year old A.P. Moeller-Maersh AIS, meanwhile, is on the verge of a breakup.
These shakeups have left those in the industry looking for any potential sign of stability. That has come in the form of marginal growth during the recently concluded third quarter of the fiscal year. Ocean freight volumes saw an expansion of around 1%. Small, no doubt, but a move in the right direction.
The good news was bolstered by several recent expert outlooks that have skewed positive. Freight that was disrupted by the Hanjin collapse seems certain to be offloaded—finally—at the correct ports, with minimal rerouting. There are even those who foresee the collapse of Hanjin as a net benefit in the long run, as the resultant slowdown in new vessel orders will restore a much needed balance in the market.
The overcapacity problem will continue, further consolidations will be necessary (as well as unprecedented scraping efforts), but so long as the ocean freight industry sets its sights on marginal, long term growth; avoids taking the short-sighted risks that brought it to this point in the first place; and have set plans to deal with potential future disruptions to the supply chain; they can help to turn the tide. In doing so, hopefully that tide will rise, lifting all boats—or, in this case, container ships—with it.
