Don’t get sick about your sea freight

Roger OakdenGlobal LogisticsLeave a Comment

Forecasts and truth.

Your business depends on plans developed from forecasts; these inform logisticians of the future. Unfortunately, there are probabilities, uncertainties and associated risks, so the forecasts will be wrong; but they ensure your business is less wrong than if you did nothing.

As an example, in my Newsletter for June 2013 (go to www.learnaboutlogistics.com to subscribe), I discussed forecasts concerning possible changes to container ship routing and capacity following the opening of the enlarged Panama Canal in 2015. These forecasts will be continually influenced by information about the container liner trade, some of which should have logisticians thinking about ‘Plan B’ for moving their goods on a global basis.

Forecasts of annual growth in maritime trade to 2020 are about 3-4 percent. Container carrying capacity in 2013 is expected to increase by more than 6 percent, adding to the oversupply of container ships since 2007. Forecasts of growth in container capacity to 2020 are about 4-5 percent per year. The difference between expected growth in trade and capacity does not seem much, but a gap of up to two percent per year for the next six years can mean a lot more ships added to the many already at sea.

Excess capacity challenge

Excess capacity means lower freight rates, as companies compete to keep their assets occupied. The Asia-Europe freight rates are currently below break-even, which make it impossible to finance even the under-employed ships built since 2007, let alone new vessels.

The usual response to lower prices is to reduce unit costs. For ship owners this means larger ships of improved design; use more efficient engines that burn less fuel and employ fewer crew. This is the direction for major liner companies which can afford the spending.

New Postpanamax and larger ships of up to 18,000 TEU will be deployed on the Asia-America and Asia-Europe routes; ships in the 6,000 – 8,000 TEU range will be diverted to intra-regional and south-south markets. These routes experience even smaller operating margins than transoceon voyages; so there will not be a profitability bonus in the initiative.

This business scenario is unsustainable. It means that to reduce carrying capacity and experience increased freight rates within the next two years, companies with fleets in the 4,000 – 6,000 TEU range are likely to go out of business and even larger ships will need to be laid-up or scrapped.

The disruption is likely to result in fewer liner companies visiting fewer ports and relying on feeder services or multi-modal port services to satisfy clients. Whatever the outcome, it may change your current freight handling arrangements, so, as a professional logistician, start to consider Plan B!


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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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