Where container shipping is headed

Below is the transcript of the keynote speech I gave this week at the Xeneta Summit 2020. It's in essence a longer discussion of the theme for #TPM21, "Redefining the Future", which was unveiled last week as we build towards the 2021 TPM to be held virtually over a full week from Feb. 25-March 3, 2021, see here: https://events.joc.com/tpm/program/theme.html

Good day ladies and gentlemen. My name is Peter Tirschwell, VP in the Maritime and Trade division of IHS Markit and I lead the Journal of Commerce including TPM, the world's largest container shipping event. It is a pleasure for me to participate in the Xeneta event and I appreciate the invitation to speak to you for approximately 12-15 minutes. I bring you greetings from Rural Maine in the USA, where my family and I have been hunkered down since May. 

Today it is my pleasure to share a few thoughts with you about the current, I would say rather unique and extraordinary container shipping environment that we are all now in the middle of, and especially about what it could very well mean for the future, starting in 2021 but well beyond that as well. 

My own view, from covering this market for many years as a Journal of Commerce journalist, and leading the TPM program for the past twenty years, is that like it or not, we have most likely arrived at a turning point in the container shipping market, and that as a result of this, the future is going to look different from how it has looked the past. This change is going to have ramifications in particular for those on the buy side of container shipping, who are obviously the shippers or BCOs, in other words many of you who are participating in this event today.

In recent years we had seen hints, really more than hints - actually plenty of evidence -that this market was leaving the post-financial crisis years behind and headed in a very different direction. 

We’ve seen for example a greatly accelerated pace of consolidation that essentially reduced the number of major east-west carriers by half. We had seen the order book steadily decline to record lows. We started a few years ago to experience something called “blank sailings”.

But as the pandemic hit this year, what was a transformation literally years in the making materialized, or took flight, in the form of ocean carrier actions and behaviors long assumed to be well beyond their reach. We’re talking about things like discipline on rates, ability to rapidly adjust capacity, achieving profitability amid a deep (though thankfully temporary) global recession, and even the ability to introduce and charge for premium services. This is all new. 

As it turned out, the past several years of carrier consolidation, restraint in vessel ordering and what I would describe as a coming-of-age of alliances as agile operating entities -- and those alliances incorporating all major carriers -- all of that had prepared the carriers for a moment no one saw coming--obviously a once-in-century global pandemic and the supply and demand-side shocks and profound societal changes that resulted. 

As the investment bank Jeffries stated Sept. 29 - roughly two weeks ago - regarding the carrier industry globally: “The stars are aligning for container shipping: historic consolidation, rational capacity management and now a fast bounce-back in demand post-lockdown.”

How long ago does the introduction of the Maersk Triple-E ships seem now? How many times over the years did my JOC colleagues and I quote carrier executives saying things like “we’re stupid” or “we can’t get out of our own way”, when one GRI after another would disappear into thin air and with it any sense of confidence or belief that pricing discipline could ever be possible. You hear that type of thing from carriers a lot less frequently today. 

The question becomes, what does this mean for customers? What does it mean for supply chains, what does it mean for the market going forward?

The way I look at it, things could really go in a couple of different ways.

If it’s all a story about carriers exercising newfound market power to drive up pricing, it’s actually not very interesting.  It would make the industry more argumentative, more transactional, and it would result in regulatory pushback as we started to see this year, with the result that people like me would be spending our time writing stories about the EU reviewing liner shipping consortia. Frankly there are more interesting topics out there for us to be covering. 

And if it went this way, it would basically be a continuation of the story of the past decade, which is largely one of carriers acting on their own behalf to deal with their own problems, rather than doing what most businesses try to do which is to find ways to create value for their customers. 

Three examples of this stand out very clearly. Slow steaming - container ships operating 25% slower than they did a decade ago--that helped carriers by cutting their fuel bill and absorbing excess capacity, but for shippers it slowed down the supply chain, increased overall lead times--it was not good for shippers. 

Similarly, take the construction of mega-ships starting with the aforementioned Triple E vessels in 2011, which I get it, reduced per-unit costs for carriers but which also slowed down shippers’ supply chains because of the days it often takes to unload these behemoths, and the fact that they typically call at fewer ports, and not necessarily the best ports for shippers’ supply chains. And finally there is consolidation itself, which enables a carrier to take out cost but leaves the shipper with less choice. 

Don’t get me wrong, I do think part of the story going forward will be carriers exercising newfound market power. There is a real possibility for example that the record rate levels now seen in the trans-Pacific due to a continuing strong bounce back in demand, combined with carriers’ ability to flex capacity in the short term, that that will carry over into 2021 and lead a different contracting season versus the last one which occurred during the depths of the lockdown. 

The comments on Linked In from the Vanguard head of the FCL business Stephanie Loomis are quite interesting in this regard. She said, “I would be warning my CEO now that things are going to change.”

And one should not doubt the carriers’ focus on acting on their own behalf. Carriers, we should not forget, are in many cases enjoy various forms of state support, but at the end of the day they are profit making enterprises, answerable to shareholders.

And they are still not where they want to be profit-wise; If you were to look at Return on Invested Capital of publicly traded carrier companies like Maersk and Hapag Lloyd, they have gone up over the past year, and will go up again this year, but in both cases will be no higher than roughly 6%, still below their cost of capital. 

This lengthy period of And over the 20 years from 1995 to 2016, average return on invested capital for container carriers was 2.6 percent (against a cost of capital of 8.7 percent), according to Capital IQ and McKinsey, and I mention this only to say that I perceive there to be great deal of pent up frustration on the part of carrier organizations when they see, year after year, themselves investing in and providing the capacity - without which trade would not move, and not really making money, while others such as freight forwarders, or marine terminals, are the ones who reap the profits from container shipping. 

You might say that the underlying tension that exists between certain carrier organizations and the forwarding industry, is tied to this very fact. 

But then again, if this industry if famous for anything, it’s long memories. If you were to ask carrier executives if things have really changed, and I have asked several of them, you would find a lot of caution. Many are not ready to declare that we have entered a new era in terms of market power shifting to carriers. 

But even that may be changing. Last week I moderated a webinar including Vincent Clerc of Maersk and Otto Schacht, the heads of the largest ocean carrier and the largest ocean forwarder respectively, as well as indomitable Alan Murphy of SeaIntelligence, and the last question I asked them was to give me a one word answer “temporary” or “permanent,” to the question of whether carriers’ newfound capacity management skills would endure, and without any hesitation, they all said it would be “permanent.”

But let’s imagine for a moment what a different scenario could look like. That could be a scenario in which carriers seek to create value for their customers, and where at least part of their compensation is derived from creating value versus blunt force market power. And a good place to start that discussion is by looking at what shippers will need from carriers going forward. 

For example, we saw during the pandemic the explosion of growth in e-commerce, which by its very nature places greater demands on the supply chain for timeliness, accuracy and accessibility of visibility and other types of data to drive decision making often in real time. And it’s not just e-commerce platforms like Amazon or Walmart that are demanding an end-to-end digital experience, it’s also industrial companies, chemical companies, energy companies, agribusiness; it doesn’t matter what kind of shipper you are: you are demanding an end-to-end digital shipping and logistics experience. 

And this gets to another aspect of where things could be headed, which is carriers being able to offer specialized, or enhanced services for a fee. 

In prior years, efforts by carriers to introduce, and be paid for, value-added services would typically disappear in the undertow of overcapacity and absence of rate discipline. The APL Ocean 53-foot container was but one example. Daily Maersk would be another example. But now carriers are introducing products or offerings like last on/first off options, faster services modeled off the expedited Matson service in the trans-Pacific, capacity available based on seasonality -- and while these services are largely still in their infancy, they are not being dismissed or rejected as as easily as they would have been in an earlier day. Think about the concept of mutual contractual commitments, bizarrely uncommon in container shipping, which is beginning to take hold as the recent growth of the contracting platform NYSHEX is showing. Some carriers like Maersk are trying to take this concept to an entirely new level in building out an end-to-end integrated logistics offering, pushing the boundaries of a traditional container shipping business, but behind the scenes you are increasingly seeing other carriers go down this road as well. 

So to wrap this up, we’re clearly at an inflection point of some kind in this market, there is no question about that. Everything we’ve seen in this historic year of 2020 points in that direction. The real question is where things actually go from here.

I personally think we’re going to see a combination of greater market power by carriers but more value creation in the supply chain, which can’t come soon enough given that that is exactly what shippers increasingly need. 

Thank you very much

@PeterTirschwell