Quest for High quality 2021: Ocean Carriers

After years of being battered by heavy seas, over-capacity and pricing complexity, the ocean container-shipping industry stands on the brink of a new era of sustainable profitability. However, the question remains whether carriers can now step off the boom-and-bust treadmill and continue to balance capacity against demand—and the entire global logistics community is anxious to receive an answer.

“As the world slowly moves toward recovery, industry analysts wonder how global ocean carriers will respond to a shift from consumer spending on goods to a restored concentration on services,” says executive editor Patrick Burnson, who has been covering the ocean carrier market for more than two decades. “At the same time, experts consider how vessel operators might reverse their long legacy of unreliable schedule integrity.”

As Burnson recently reported, due to this environment that finds ocean carriers re-gaining their balance, logistics managers are now approaching new contracts from a high-value strategic perspective this summer and into fall. “While shippers can play the spot market if they can handle the risk, our analyst contacts are suggesting that they lock into guarantees at a premium price at this stage while carriers steady the ship,” adds Burnson.

On the service front, our recent reports reveal that ocean carriers are taking all available measures to improve the speed and efficiency of cargo movement, including employing all available vessel tonnage. “When demand dropped some 20% to 30% in the second quarter of 2020, carriers curtailed services and idled vessels,” says Burnson. “However, as cargo volume rose, carriers redeployed those assets as quickly as possible—and that’s reflected positively on carriers.”

According to Logistics Management readers, the strategic moves made by the 11 carriers listed below over the past year have earned them Quest for Quality gold. Leading the way into port this year with the top weighted scores we find Seaboard Marine (49.87) and Hapag-Lloyd (49.64).

This year, Seaboard Marine put up top marks in the On-time Performance (13.92) and Value (12.87) attribute categories. Hapag-Lloyd earned top billing in year’s Information Technology category (8.91), while K Line and Matson both posted an impressive 10.30 in the Customer Service attribute category. In the Equipment & Operations category this year, Seaboard Marine, HMM, and Crowley Liner Service all posted an 11.22, the top mark for this important attribute.

2021 Ocean Cargo Roundtable: New regular settles in

While there’s no softening of demand from consumers, there is still a shortage of labor, equipment and shipping capacity to meet their expectations. Out panel of ocean cargo experts agree that supply chain disruptions, port congestion and rising shipping costs could continue to be challenges through the end of the year.

Joining us in Logistics Management’s Annual Ocean Cargo Roundtable are Jon Monroe, president of Monroe Consulting; Sarah Banks, managing director and global freight and logistics lead at Accenture; and Chris Jones, executive vice president of industry and services for the global trade database Descartes Datamyne.

Logistics Management (LM): Do you expect U.S. consumer demand to be high during peak season?

Jon Monroe: First we need to ask if we really do have a peak season. There seems to be no seasonality left—just one big surge of containers. We haven’t left the “add to cart” mentality as more consumers continue to purchase online. As we re-open, we may expect a shift in the type of product purchased, but I don’t see a norm developing for some time—at least not the kind of normal that we experienced pre-pandemic.

Chris Jones: The potential is there for consumer demand to be high because we’re in a situation where the general feeling is that COVID-19 is seemingly in check. The economy is rapidly re-opening and, as a result, people increasingly want to get back to normal—and that means going out to shop, traveling, dining in restaurants, attending entertainment and sporting events. With these types of consumer activities increasing, we could see higher demand for goods and services, but potentially lower inventories, which will cause prices to rise.

LM: Does that suggest that inflation may have an impact on demand if not controlled?

Sarah Banks: That’s a question everyone in the ocean cargo marketplace is asking. After decades of a low inflation environment, many are expecting an uptick. No one can predict how lasting the inflation impact will be over the next 24 months, but this likely presents a situation most organizations have not lived through for almost a generation. The upside is that companies are ready to engage in broad, commercial discussions—including pricing—on how to grow while maintaining margins.

Monroe: I agree with Sarah. In the short term, everyone expects some inflation. To the extent that it’s short term, it will have no impact. If we move into 2022 and have significant inflation, everyone will pull back on spending, which will be good for our economy. Our economy is simply too hot. It’s driving supply chain costs through the roof, and until there’s a slowdown of product moving from Asia to the United States, we’ll have no pricing relief.

LM: Meanwhile, will ocean carriers be able to sustain the current high-rate structure?

Monroe: Unfortunately, yes, and for many reasons. First, they have learned how to manipulate space through blank sailings to keep capacity below demand. Second, the cost of operating vessels has gone up. Charter rates are more than double, and carriers have purchased more equipment. And third, and most importantly, the carriers are enjoying a time when they’re making money. The old market share model that carriers pursued is all but dead.

Jones: Current projections indicate that the current situation will continue through the first quarter of 2022. This means that ocean carriers will likely be able to maintain their current sky-high rates throughout peak season and beyond.

This is mainly due to the ongoing issues of port congestion, equipment and labor shortages, combined with the high demand for goods and reduced inventories. And after we work through the current backlog, rates will likely start to reverse as the demand for commodities eases. As we move toward the midpoint of next year, our expectation is that the congestion will alleviate.

Banks: The ocean industry historically operates in cycles, with rates fluctuating over typically sustained periods, going up and then going down. The one we are in now represents a sustained “up” cycle that continues to be shocked mostly by the effects of the pandemic that have created a variety of constraints in port operations, vessel capacity, container availability and intermodal operations.

These constraints are still creating backlogs in shipment demand, further stressing supply chains and creating more urgency to order and move product inventory that can address both current demand as well as a buffer to address future needs.

LM: Do you expect shippers to leverage volume for favored status?

Monroe: No. Carriers don’t care about volume. It’s all about getting the rates to a sustainable and profitable level. We will never return to the days of old, as carriers walked away from a number of shipper contracts this year.

Jones: Not any more than is already happening. Traditionally, shippers that could guarantee higher volumes would be preferred by carriers and receive lower rates. The logic here is simple: Carriers need to fill their ships with cargo, and if a single shipper can fill most of a ship, then life is simpler for shipper and carrier alike.

However, what we’re on the lookout for in the coming years is a shift in the “favored/preferred” dynamic. For decades, high-volume, major retailers have set the baseline for shipping rates and, obviously, have that “favored” status among carriers for their ability to fill cargo ships.

Banks: I’ll add that while the proliferation of new products from carriers that provide broader constructs for shipper-favored status will evolve, most recognize that the relationship between shippers and carriers around minimum quantity volume commitments and corresponding capacity guarantees has always been complex.

There was little consequence on either side for failing to live up to their respective side of the bargain. This has led to carriers allowing allocation overbooking—when they suspect a shipper shortfall—and shippers overbooking to ensure that their cargo isn’t rolled. It has been a vicious cycle.

LM: What about service? Can carriers deliver on their promises, or are they overwhelmed?

Banks: Carriers are able to better deliver on promises today than they did six months ago, as they better understand the impacts to global supply chains and the effect on ocean shipping demands.

However, the heavy demand, and in some cases poor response by carriers to improve service, has led many shippers and forwarders to just adapt to these difficult conditions, putting more effort in to manage each export booking to ensure service commitments are well understood and can be met. It’s a balance of carriers stabilizing services, and shippers and forwarders lowering expectations that have helped to reduce the carrier burden of missed service levels.

Jones: Carriers are most certainly overwhelmed. They’re operating in atypical conditions, including the fact that ports, warehouses, labor and land transport are all overwhelmed themselves. Can they deliver on their promises? Hard to say one way or another, but it’s fair to say that their customers know these are highly unusual times and that everyone is doing the best they can. Next year we may see a return to normal in terms of service.

LM: How likely will shippers opt for air cargo if ocean carriers can’t manage schedule integrity?

Monroe: Many shippers are already opting to move their product via air. The brand retailers are especially keen to do this, and it’s being done this very minute. However, not all companies can afford the price of airfreight. It depends upon the value and margin of goods. Importers are now prioritizing their product based upon profitability and out of stock items. And as premium services increase in price, air is an easier option, as the price differential is not so great.

Jones: I disagree. Unless it’s an absolute emergency or if a given air shipment is economically viable, it’s unlikely that shippers will forgo ocean for air. Because shipping by air commands a premium rate, the preference of shippers will be to continue going through sea lanes and endure the delays, but they will want to set appropriate expectations with customers so that they can plan accordingly.

Banks: Shippers whose supply chains typically involve shipping large volumes by sea will keep moving containers as part of their overall transportation approach. The constrained capacity availability in air, the higher costs, and the smaller pallet sized shipments make air a difficult choice for large shippers.

This isn’t to say that shippers will not use airfreight to help supplement inventory demands, but it will be an “and” versus an “or.” Shippers will continue to make the necessary adaptations to get through ocean carriage service level issues and will use airfreight strategically—and when required, to help keep supply chains running.

LM: Will global supply chains remain clogged for the rest of the year? What is the solution?

Monroe: Yes, expect the congestion we see to worsen as time passes. The recent crisis in the port of Yantian will drag this out for months. The backlog is severe, so add four weeks to six weeks to your lead-time, ship early and supplement your ocean with air.

Banks: A key part of the solution will be the stabilization of the trans-Pacific eastbound trade as the severe congestion impacts seen at the U.S. West Coast have had a knock-on effect to the other trades. If, for example, shipping lines were able to return empty equipment currently tied up in the United States back to Asia at its normal frequency, the impact to that trade, but also the export trade out of Asia, would be improved, lessening the stress on the global network.

Jones: The current backlog will likely remain at least to September or October. After that, and based on the assumption that the pandemic is now in check, we will potentially see an improvement as the high demand for goods starts to ease. Because every part of the supply chain is affected, the best solution might be to chip away at the backlog and work our way back to more normal levels.

LM: As we mentioned, ports and terminals are congested too. Should shippers avoid bottlenecks on the U.S. West Coast by sourcing from the East and Gulf Coasts?

Jones: In some cases, but many will continue to experience the delays we’re seeing today. It’s also possible that other ports are facing somewhat of a similar situation as the West Coast ports. Understanding the reasons for the bottlenecks on the West Coast is important because similar factors may already be—or will soon be—impacting other ports.

Banks: Shippers should be continually assessing all elements of the shipment flow to make real-time adjustments in response to supply chain challenges. This includes export port conditions, trans-shipments versus direct sailings, and of course the arrival port constraints.

Based on the current port and infrastructure challenges on U.S. West Coast, moving cargo in and out of the East Coast and Gulf Coast ports can be a good option depending on service availability, cost and other factors such as brokerage relationships and inland transport concerns.

Monroe: On a final note I’d like to point out that Southern California ports will face a new challenge when dockside labor negotiations take place next year with the International Longshore and Warehouse Union—shippers may wish to brace for a slowdown. 

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