Drewry’s Supply Chain Advisors Shares Insights on Peak Season Strategies

Editor's Note: As he has done in past years at this time, Philip Damas, head of Drewry's Supply Chain Advisors, shares his views on the current ocean cargo arena.

Supply Chain Management Review: Will the ocean carrier alliance structures finally make carriers more solvent and more reliable?

Philip Damas: Ocean carrier alliances – and there are now just 3 of them – are still not able to provide “reliable” service considering that, on the major routes, no more than 80% of vessels arrive on the scheduled arrival day. This will not change for a while. At best, the carrier alliances continue to provide a relatively stable supply of ship capacity to the market and a relatively predictable network of weekly services, but they have come under criticism. The International Transport Forum, part of the OECD, has recently argued that ocean carrier alliances totally dominate the container shipping sector and contribute to lower service frequencies.

We do not agree with this view and believe that carrier alliances are delivering better service networks than individual carriers would (without alliances) and also provide lower costs to customers. But we see that, when ocean carriers start to lose money, they always turn to cost reductions, lower service reliability and lower service levels – there does not seem to be a price premium for higher-quality carriers in difficult times.
There will be a need for over-capacity to reduce, first, before we see ocean carriers improving their balance sheets and before we see carrier alliances improving their service reliability.

Drewry tracks the “Z scores” of ocean carriers (which estimate their financial strengths) and these scores are currently low, particularly for 2 vulnerable carriers.

SCMR: Are shippers seeing more transparency in pricing and service as a consequence of enhanced information technology?

Damas: There is an increasing number of ocean price indices, which provide more transparency on spot freight rates on the “power routes.” Online marketplaces are also providing spot freight rates on numerous routes, but these rates tend to be on the high side (providers do not wish to disclose their most competitive rates except on a bilateral basis).

Contract freight rates are much less transparent today, although this could also change as new online marketplaces are introduced to cater for this more complex segment.

The availability of cargo visibility tools is spreading and this makes it easier for shippers to assess the reliability of services and the performance of their vendors. But our BCO customers still have unmet needs when it comes to tools to report certain performance indicators, such as the incidence of “roll-overs” (delayed shipments) - we are actually working with technology partners in this area.

SCMR: Should we expect international trade tensions to have an impact on vessel deployments and schedules?

Damas: I assume you are referring to the U.S.-China trade war and the Iran situation.

On the former, carriers have already removed 3 loops from Shanghai to the West Coast and 1 to the East Coast in the past year, while maintaining or increasing services from tariff-free South East Asia to North America.

If the U.S,-China trade war escalates, this restructuring of transpacific ocean networks will result in larger changes in vessel deployments and schedules. South East Asian services would then become more frequent and more mainstream, while China services could lose some of their current dominance in the world of transpacific ocean services. The transatlantic route is busier than in the recent past – and freight rates much higher – while the China-U.S. route is clearly declining.

The Iran situation could have huge repercussions on all the carrier services in the Middle East Gulf if the Strait of Hormuz is shut down due to attacks on ships transiting the Strait. But the economic interests of keeping the Strait open are so vital that we would expect that political powers in the region will not allow this to happen. There is now a Saudi rail landbridge alternative to the dominant Strait of Hormuz maritime route, but it could not handle the container volumes to and from the entire Gulf.

SCMR: Can you share any insights on the status of IMO 2020 preparations and the freight rate implications shippers may expect to see?

Damas: Most U.S. shippers have reviewed their contract bunker formulae to take into account the switch to the new IMO 2020-compliant fuel before signing their new May 2019-April 2020 transpacific contracts. So, most are prepared for the switch from a shipping contract viewpoint.

But there is still no established price for the new, compliant low-sulfur fuel, so being prepared or confident in terms of budgeting is much harder. Some shippers have relied on the Drewry IMO 2020 Cost Impact Calculator or other independent experts to forecast both the increase in the fuel cost or the net increase in their annual ocean transportation spend.

Drewry's calculations have shown that, with the exception of small-sized shippers (10,000 TEUs or fewer containers a year), the cost impact runs into millions of dollars a year per company. Globally, the IMO 2020 cost will exceed $10 billion – to be shared between several thousand shippers, several thousand forwarders and 30 or so main ocean carriers.

SCMR: Any other trends we may expect as we inch closer to 2020?

Damas: Following a difficult 2018 peak season and widespread congestion and performance issues in early 2019 in the transpacific trade, shippers and NVOCCs are increasingly turning their attention to ways in which they can make ocean transportation services more reliable, more predictable and less prone to “roll-overs.” Some small and medium-sized shippers have learned, at their cost, that having a very low freight rate could mean being the first customer to be put in the queue for ship capacity.

We believe that the focus of shippers in the next year or so will be to secure capacity, reduce the risk of under-performance and making sure that providers react faster to problems.
This calls for new technology-enabled forwarder and carrier “guaranteed services” like the KN Pledge service and the APL EagleGo Guaranteed, to name a few.

But it seems that all stakeholders will need to go back to basics and define what they mean by a “quality” service and how to incentivise providers to deliver a more reliable services to time-sensitive shippers who really need it, while keeping their main services low-cost for the majority of their customers.

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