World Shipping Council Outlines Supply Chain Strategies for 2016

Christopher L. Koch, who just retired from a 15-year tenure as president and CEO of the World Shipping Council (WSC), and continues to serve as its senior advisor, is still telling shippers to stay the course.

In an address before the Pacific Transportation Association in Oakland this week he outlined how container lines are dealing with the world's biggest transportation challenges. These include the effects of mega-ships, environmental stewardship, trade lane overcapacity, and new regulatory regimes.

The WSC comprises the top 25 container lines in the world, which collectively control more than 17 million twenty-foot equivalent unit (TEU) capacity on 3,500 oceangoing vessels, representing 91 percent of all TEU on the water.

Jahan Byrne, President of the Pacific Transportation Association, noted in his introduction that Koch has “seen it all,” in his distinguished career. During his 15 years of leadership, he helped the liner shipping industry build WSC into a respected advocacy organization that represents the industry effectively in Washington, in Brussels, at the International Maritime Organization and World Customs Organization, with other international and national government and industry bodies, and with the media.

Koch began his speech with the obvious: the international liner shipping business remains financially challenging. Shipping rates are under constant pressure. Carriers generally obtain financial returns that can please few owners.

“The strategies being used to compete have obviously evolved over the past several years,” he allows. “Most carrier-shipper commercial relationships are price driven, and the nature of the business makes it difficult for a carrier to offer anything but a service the customer sees largely as a fungible commodity. Those carriers that tried to differentiate themselves by providing higher cost, but premium, service have had a tough time making those higher operating costs pay off. Higher cost services struggle to attract enough cargo at rates needed to cover those higher costs. As a result, carriers have had little choice but to focus on cost-savings and increased efficiency as their strategy.”

Koch noted that ocean carriers have pursued cost saving measures such as “slow steaming” to save fuel. They have gotten out of the practice of providing container chassis here in North America. They have invested in larger, more fuel efficient ships that have lower costs per container slot – even if that means fewer service strings, and some challenges at some marine terminals that have to handle the cargo volumes associated with loading and unloading larger ships.

“But carriers can't control the market, so they must focus on areas where they can hope to have some control – their operational costs and efficiencies,” he says. “Shippers may not have asked for slow steaming because it takes longer for their cargo to be delivered, but there are simply not enough shippers willing to pay the higher fuel costs of faster service. “

Koch acknowledges that shippers “may not like” ocean carriers getting out of the chassis business, but chassis have been a huge expense that rarely paid off for an ocean carrier. Conservative estimates previously put the cost of owning and operating the U.S. chassis fleet at about $1 billion a year.

“Shippers may not ask for larger and larger ships, but if these ships are more efficient per container carried and provide a better way for carriers to manage their costs, their use is inevitable,” he adds.

Finally, says Koch, shippers may not ask carriers to form vessel sharing agreements or VSAs, but aside from select niche markets, there is a recognition that this is an industry whose profitability largely depends on scale. Scale requires very large, long-term capital commitments, often in ship assets whose size requires sharing the space with other carriers.

“Very competitive market pricing – and the resulting strain on carriers' profitability – seems likely to be with us for the foreseeable future,” says Koch. “Substantial cargo growth would improve carriers' prospects, but this remains an uncertain prospect and an unlikely salvation at present.”

Industry consolidation would also help address the industry's structural defects, but that is likely to be a slow and uncertain process and unlikely to produce significant macro-market effects in the near term, Koch contends.

“A continued crusade by carriers for cost control will exist for the foreseeable future,” Koch observed.

This is an observation shared by many analysts, including Stijn Rubens
Senior Consultant for Drewry Supply Chain Advisors in London.

“As long as there is over capacity in the market and sufficient sales channels that are willing to undercut each other, the rates will not increase in a sustained way,” he tells SCMR in an interview. “But we have seen volatility on the spot markets increasing to reach extreme levels.”

http://www.logisticsmgmt.com/article/ocean_carrier_mega_alliances_called_into_question

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