Getting back to the basics
The Global Container Markets have seen interesting times during the last two years as we have come through the COVID pandemic, whilst most of the world suffered it has brought a massive change of fortune to the beleaguered Container Shipping Sector, with the top ten Ocean Carriers collectively profits exceeding $600 billion during the last 24 months.
During COVID most of the Ocean carriers engaged with sharp practices as they feigned the shortage of available containers for export bookings. Of course, COVID had a major impact on available containers with 1000’s being backlogged and jammed across the Ports, Terminals, CFS, Container Yards and of course at the Importers premises.
The Carriers reverted to purchasing new containers across Asia, which allowed them to manipulate the booking rates for their Exporter client base. As freight rates rocketed to the stratosphere with the Exporters seeing freight rates going from the $1,000 to $2,000 mark pre-covid to more than $20,000 per teu during the pandemic.
Of course, like all Bull markets, the good times are rapidly headings towards another Bear market and today we are hearing from all of those Tier One Carriers Groups CEO’s reflecting that 4th Qtr financial results have dropped as they are seeing rates hover between the $4,000 to $6,000 mark, but these are sinking faster than the doomed Titanic did on her maiden voyage and they will soon see rates perhaps further south than pre covid times.
As the Party comes to an end, the cold light of day starts to emerge leaving a less than euphoriant hang over for the Carriers CEOs to deal with. So many are beginning to adopt quick fixes in attempts to mitigate the loses that will start to emerge during 2023 -24. These quick fixes have included reducing the available tonnage on key trade lanes, off-hiring smaller vessels, dropping slot capacities, cancelling sailing schedules, whilst also reducing new build containers at export locations. These have helped stem further drops in their freight rates. The trouble relates to the sheer numbers of containers that are sat idle within major import regions. They have also undertaken the bare minimum of empty container repositioning, but this is certainly not something they like to do on large scale. Other operators are looking at investing their vast profits into other sectors of the Supply Chain, as they move towards the inland logistic sectors, whilst others invest into different Business Verticals outside the global shipping markets all looking to spread their financial risks.
The Ocean Carriers are faced with an even bigger problem as they have masses of surplus Containers stacked eight high in Depots across the World, we hear in the market that most storage facilities are running at 99% to 100% capacity, and the Carriers are running out of options. The vast number of new containers they either leased or purchased during COVID for one-way trips are adding jet fuel to a fire that is already burning bright.
The impact of excessive container fleets
The Carriers have always built their business models on operating excessive container fleets, this has stemmed from their seeming in ability to fine tune and analyses their booking patterns for main trade lanes. The nature of the Container business has always focused on the volumes of bookings that occur, and the traditional methods that the Carriers IT systems collate and measure quotations that are transferred into actual bookings, of course they also live on slot commitments that are made by the global Shippers and Forwarders and the spilt between long term service agreements verse their ad hoc bookings. Of course, the Carriers rely on the mix of their internal commercial teams and agents that are given a percentage of slot allocations to fill. In most cases there is always discrepancies between projections verse actual bookings, and these percentages can fluctuate significantly. Other factors that the Carriers deal are the seasonal trends that create peaks in the sector and of course there will always be troughs to ride. The Carriers Logistics divisions have always looked at meeting demand with a steady flow of containers, however they have faced an uphill battle as the rather antiquated legacy-based technology platforms have struggled to keep supply and demand in the right proportions. Of course, the Logistics teams face insurmountable challenges as they look at meeting the booking demands, against the specific type, size, and quality of the containers they must provide to meet a shipper’s specific demands. Other influences come into play as containers get damaged, are not always available and of course containers that get delayed or kept at the importers premises or delayed in transit.
But this does not detract to the sheer glut the Ocean Carriers have in terms of inventory, with the average container being kept by the lines for anywhere from 12 to 14 years, and their lengthy long term leasing contracts for additional inventory continues to hammer their financial bottom-line results.
Of course, you will hear from those Lines CFO’s that these are considered an asset on their financial bottom, line but to be honest are they really an asset if they sit idle in yards for months and sometimes years at a time. But owning a massive inventory of containers is like a double edge sword on one side the fleet can reflect on their companies’ assets, but on the other side they are tying up capital, they are costing millions every year in costs (Storage, Repairs, CAPEXs, Insurance) and of course depreciation. An asset is only of value if its continually used carrying freight and earning the Operator dollars.
Accurate inventory control has always hampered the tier One Carriers, as again it reflects to their aging technology platforms that struggle to provide real time inventory reports on their overall container fleets. Container Control systems need a serious overhaul, and better utilization of advanced next generation optimization and forecasting tools would bring a definitive improvement in the way that the logistics team better interface with commercial demands.
Identifying the idle stock is the first step towards a good house clearing event. Of course, I can already here a barrage of arguments and debate on why this cannot be achieved. Yes, we are certain to get the following responses from the Ocean Carriers: -
- What do we do with the excess equipment?
- If we flood the market with old inventory, it will kill the resell value, coupled with the actual demand in those areas for used units?
- A global recession is on the cards and selling off equipment might be a struggle, especially as a large portion are sold to the construction industry.
- If we look at a major scrappage project that might create an issue the wood flooring is mostly contaminated, the steel is different qualities and of course there are only a handful of scrape merchants big enough to consume large volumes.
Other issues face the carriers, as when looking at their inventory that is littered across multiple container yards, many are buried deep in stacks and with yards operating at almost 99% capacity moving and digging out boxes would be a timely and costly exercise.
So have I painted an almost impossible task, well on one hand you have the issues, but on the other you have the benefits.
Let’s look at the ways the Carriers could start to reduce their container equipment pools.
- Steady Off hiring of their leased container units
- Gradual selling of equipment those units that are over the 10-year mark.
- Start a gradual scrappage scheme of containers over 12 years old
- Looking for alternative use for containers. (A lot of alternative housing is created using containers, the developing areas of the world – India, Africa and soon the Ukraine will be looking for masses of containers for storage, temporary housing especially as the war in Ukraine will soon hopefully be resolved).
- Slow down on new equipment orders.
I ran a survey on Linked-in a week ago in which I asked the question what percentage of your container fleet is currently sitting idle. I had some 3,000 views of the post and the results for the pool highlighted the following:-
- 5 % of your fleet Idle (Votes 3%)
- 10% of your fleet idle (Votes 20%)
- 15 % of your fleet idle (Votes 25%)
- 20% (+) of your fleet idle (Votes 52%)
So if you looked at one of the tier one carriers operating 5.0m teu basing on the survey results –
- 5 % idle 3% = 150,000 teu
- 10% idle = 20% = 1000,000 teu
- 15% idle = 25 % = 1,250,000 teu
- 20% idle = 52 % =2,600,000 teu
So, if you start putting $$’s figures around this idle equipment we are talking 100’s of millions of wastages on an annual basis and currently the carriers call this the cost of doing business. As mentioned, these costs include: -
- Maintenance and Repair
- Mt Storage / associated yard expenses
- Capital costs
The reintroduction of the Common Grey Container Fleet
In the past a common grey container fleet was adopted, whereby common technology was adopted, like minded carriers brought their collective container fleets together, the benefits for those operators during the life of the pool were significant. Container fleets were significantly reduced, common standards adopted, a more effective method of allocating containers against bookings, and the ability to reduce head count across those participating lines all formed major benefits to those. Common technology platform was born and helped drive a higher optimization of a smaller more efficient fleet. The savings ran into the millions.
One thing that the Pools lacked in those earlier days was the technology that could achieve even higher levels of efficiency. The great thing is that technology today far exceeds those early developments. The question of neutrality springs to the carrier’s mindset, well in today’s markets we are fortunate to have key System Integrators like “Wipro”, “Tech Mahindra” the folks at “WNS” also are making massive inroads into the world of outsourcing of shipping services and technology. These global giants have the infrastructure networks and resources to make that transition far more compelling for the Senior Executives sitting at the carriers’ corporate offices.
Taking the technology approach
Today’s carriers as mentioned are running monolithic legacy-based solutions most of these are over 20 years old, they have grown over the years to become true goliaths in terms of managing and running the carrier’s business models. However, these old systems are running on borrowed time, they lack the capabilities to embrace modern technology. Most lines, spend anywhere from $80 to $100m plus on annual maintenance and support of these old systems.
The core architecture lacks abilities to process data and provide accurate real time management of the carrier’s container fleets. Wait for it I hear the lines defending their positions by saying they have upgraded systems, they are turning to digital twinning, block chain, machine learning and AI engines being bolted on to their existing systems. But bolting on superchargers to an old engine that has been once to many times around the clock is bad decision. The fundamentals must be considered going back to the basics and designing a new engine with a streamlined framework that incorporates the newer technology is the natural way forward.
There are some smart technology companies out there in the market, players like Intellect Technologies have designed next generation global liner systems, CNB Tek out of India have evaluated the optimization and real time stock reports across busy CY’s ICDs and major distribution hubs.
So what is the future?
Well things are going to get worse before they get better for the Ocean Shipping Industry, the positive things are that most have built massive financial war chests to weather the inbound tornado. However, this is the time for radical out of the box thinking. Tackling inefficiencies during these hard times will help create a much better financial eco systems once the storm has passed. So perhaps looking at key areas of your container management, technology, container pooling and outsourcing could all bring significant benefits. As the Chinese like to say “We live in Interesting times” so become proactive to the situation, don’t just think quick fixes are the answers. The problems still exist, and it will take a non-conventional CEO to take these steps to change their business models for future prosperity. Let’s see who is up for the challenge!!!
About the Author
Richard Butcher has spent the last 35 years in the maritime space. During his diverse career he has worked on a wide range of shipping, logistics, technology projects taking him around the world. Currently he spends most of his time focused on advisory and consulting assignments within the maritime and logistics technology and is also a budding author have written and published a series of fictional Action and Adventure novels.
Copyright © 2022. All rights reserved. Seatrade, a trading name of Informa Markets (UK) Limited.