2012 State of Logistics: Ocean: Focus shifts to value

While no major multinational corporation wants to hear that supply chain expenses may soon escalate, there is actually an attractive aspect of this forecast. Ocean carriers—and the lead logistics providers who work with them—may rely on a sustainable level of capacity and service through 2012 and beyond.

According to Drewry, a London-based maritime advisory, nearly 60 new vessels of at least 10,000 twenty-foot equivalent units (TEUs) are being staged for deployment. And while the active global ocean cargo container fleet has grown by less than 2 percent to date, analysts feel that it will expand more than 7 percent by the end of this year.

The major question, however, is whether the buying spree of last year will pay off. Overspending and rate cutting to win market share proved to be profoundly damaging strategies for all but a few ocean carriers.

Just how bad was it? Maersk, the world’s largest container line, reported a significant loss last year, along with France’s CMA CGM SA and Hamburg-based Hapag-Lloyd AG. Industry analysts blame frenzied bidding on the world’s two largest container-shipping trade routes. According to SeaIntel Maritime Analysis in Copenhagen, the cost to the industry overall was a staggering $11.4 billion over the previous 14 months.

Nor were things much better for COSCO, the largest integrated shipping company in China and the second largest in the world. Container shipping and related business moved volumes totaling 6.91 million TEUs in 2011, up 11.2 percent from the previous year. However, revenues from this segment were down 11 percent year-on-year.

What did the carriers learn through all of this? Several things have become clear:

• To save on ever-increasing bunker fuel costs, carriers will use “slow steaming” on major trade lanes whenever possible. At the same time, they will impose the Bunker Adjustment Factor (BAF) as a surcharge to mitigate sudden fluctuations in fuel rates.
• Many carriers have now grouped together on the core Asia-Europe trade to pool their largest ships into fewer services and to share costs. This was unlikely to have happened several years ago, but has been forced out of necessity.
• Carriers will make charter deals on a more short-term basis, too, as they do not want to run the risk of being in a locked-in contract when cargo demand suddenly ramps up. At the same time, cash-strapped carriers may alter this tactic somewhat by offering parts of their fleets on longer terms to generate sufficient revenue to remain operational.
• Indexed contracts will become more widespread, as both shippers and non-vessel-owning common carriers (NVOCCs) have a growing appreciation for them. That’s because indexed contracts enable carriers to differentiate themselves based on service rather than price.