Carriers Joining Forces to Better Manage Costs in Container Shipping
January 28, 2014 The coming year could bring major changes in the container shipping industry. We expect ocean carriers to make significant moves, looking for concentration across trade lanes to reduce costs. If they succeed, it will help their negotiating power with shippers and other parties on the logistics and supply chain.
Between 1993 and 2008, global trading has almost quintupled in value and tripled in volume. The lack of stability goes beyond the historical conduct of regional markets. For the time being, keeping up with violent market fluctuations has proven impossible for the industry. When analyzing freight rates, one can say that demand expands and contracts in vertiginous ways, while supply needs far more time to adapt. Unsustainable freight rates are a direct consequence of this pattern.
Subject to approval from regulators, the three largest container carriers in the world (MAERSK, MSC, and CMA-CGM) have announced a game changing strategy: the P3 Network, created to exclusively deal with operational aspects of vessels on certain routes. In a response, the G6 Alliance (Hapag-Lloyd, NYK, OOCL, Hyundai MM, APL and MOL) will expand its network. Together, these nine companies control about 55% of global capacity. Joining forces should help carriers better manage their resources.
This would, in theory, not only reduce costs, but also grant them higher a control over supply, preventing rates from stagnating at unsustainable levels. Making the freight market more stable and sustainable will certainly be beneficial for everyone.
For the moment, commercial and marketing policies will still be held independently by each company. This will enable them to differentiate from each other on quality of service.
That sounds great, but we suspect the emphasis will still be on reducing costs, especially when the market stabilizes and they are less flexible.
Cargo and transport inevitably need each other. Neither of them can develop and grow without the other. The correlation of forces at the time of negotiations can only shift relatively from one side to the other, as each represents the other’s limit.
In line with that, in the short term, we believe that the best way to adapt to these coming changes will be to concentrate the negotiation of rates and conditions for shippers. Acting in a larger number of markets, handling bigger volumes, and having the possibility of choosing from as many alternatives as available in each of them, will provide the shipping companies and cotton shippers with the possibility of obtaining the best possible conditions to serve their needs, at the time of negotiations, thus adding value to the whole supply chain.
We believe that all actions aimed at reducing costs and providing sustainability for key actors in the supply chain are certainly positive. However, standardization derived from high concentration might not always have a positive impact on all parties.
As obvious as it may sound, trading is performed by people who happen to have diverse interests. As long as this is the case, there will also be someone who can better interpret those needs, and provide them with the most convenient solutions.
In a scenario dominated by such concentrated forces, keeping that information in mind will be of the essence when seeking a competitive advantage.
GET THE NEWSLETTER TODAY!
