In today’s dynamic business environment, no single strategy seems to be useful in terms of predicting & implementing a long term plan to outbid the competition and shipping industry is one area that is also proving this. There used to be a time where big importers were given a contract that rates were valid one year with an exception of PSS (peak season surcharge) which is applicable mainly to Asia market. The contracts were given to really big importers like 1000 Teu or more & remaining of the market was served by small to medium size forwarders and even their rates were steady through the whole year. Then came the Grand Recession in 2008 and all the calculations done based on economic growth and new vessel orders changed the dynamics in shipping industry, let’s evaluate the new trends in shipping industry happening due to this change:
In 2012, carriers announced 8 total GRI’s during the year and most of the announced GRI’s were at minimum $300/40 and in 2013, that # went up to 9 months, with the exception of February till April where Chinese new year effects are in effect, we had a GRI every month last year. Even though an importer signs a contract, it literally does not mean much as long as it is subject to GRI/PSS (which is a term many contracts have). This ambiguity does not help the importer as they do not predict their cost in advance & do not price their goods accurately which affects them in lost sales (opportunity cost). Based on the profits that steamship lines are announcing every year this new pricing also does not offset their loss in their balance sheets as for the last 5 years major carriers were profitable only for 5 quarters (which is a little higher than 1 year out of 5).
There used to be a time where importers were only given a freight amount & floating Bunker fee which was adjusted every quarter. Again for the last 4-5 years, we are seeing some creative charge mechanism like freight is now subject to a daily chassis fee, low sulphur fee, security fee (isps) etc. and the terminals or rail ramps follow this trend with their own creativeness with pier pass, clean truck, chassis split fees (repo fee) etc. so ocean liners became the airlines who charge for every single item used on a plane (where we are close to pay for a fee to use the restroom in the airplanes). Again this ambiguity and excessive hidden cost is a big burden on the importer who has hard time not only do its own pricing but effectively negotiating its own contracts. This new trend in passing all the extra costs to consumer and focus on the main business model seems to be the trend in going forward as steamship lines are relying less on their chassis pools, selling everything that they can. One good example is Maersk line recently sold its assets of its trucking subsidiary Bridge Terminal Transport (BTT) with the explanation given as “a provider of drayage services does not fit in our long term focus.”
The new trend RESHORING which basically is relying less on cheap labor from china & moving some of the manufacturing jobs back to USA is also gaining a momentum especially for certain commodities. GE for example is investing heavily on a plant in Kentucky that will be half automated and remaining will be done through hiring new labor in USA & like GE many others with the help of government subsidies are opening plants in inland parts in USA. The estimate of production coming back to US is estimated to be 10 % during the coming years. This again is bad news for the carriers that ordered their new mega vessels based on double digit growth rates from china which may not happen in some time foreseeable future.