It is an open secret that carriers have been losing money to consolidators and losing big time over the last 5 years. The reason is simple and straight forward; myopic vision from carriers, relentless thirst for flooding market with capacity and almost complete lack of customer focus. This is also true for air carriers but the major ones leading the lag are the ocean carriers.
The so-called peak season surcharge will dwindle as time passes by and there will be little differentiation between peak and lean season charges as the market continues to have excess capacity. Today there are major revenue leakages for ocean carriers vis a vis weight and console cargo.
Weight Restrictions: Typically these are the metals and scrap linked clients who simply tend to overload the containers. Just because they provide base volumes, most carriers have been extremely lenient on these customers in quest for volumes. Business dynamics have changed and it is extremely critical that businesses pay for what they use. In the earlier days, when freight was on the higher side, the leniency was justified but not anymore. Metals and Scrap create a lot of damage to containers and hence make them under-utilized over the span of 1 year [if the average utilization for 20' containers is about 5 times for general cargo, it tends to be a shade below 4.5 or so for metals and scrap related containers!!!]
Moreover, these commodites apart from Granites, Marbles and Stones demand a significant share of Heavy Duty containers. Heavy Duty containers should attract at least a 100 dollar premium over regular containers. Also the fuel surcharge must be higher on heavy duty containers. Yes it is challenging the status quo that was there for almost 40 years now. Shipping Lines must also remember that the Baltic Dry Freight Index is at lifetime lows adjusting for inflation and hence, the status quo must be challenged. Every innovation or best practice will challenge the status quo and that is how industry standards change. Had Sealand not challenged the status quo of Bulk Shipping, then we would never have containerized shipping at all!!!
Also, the free-time awarded to such commodity corporations is significantly high. Yes, granted that the Steel industry is going through its cyclical downturn as well but all businesses are run for profit. Do these companies compromise on the freight rate for trucking ore or for that matter trucking the container loads to the port? Obviously not because diesel price deregulation and steady wage bill increases force people in the business to accept the higher costs. Yes all shipping lines have the tendency to say 'Yes, we would like to have this but who will bell the cat???' It is critical for shipping lines to come together on this issue and collectively raise the bar [as is done for BAF, CAF levies]. Volume share without Yield Management is futile and unhealthy for the longer term.
State run shipping lines can afford to play such under-pricing games at the expense of the tax payer but private corporations answerable to share-holders cannot. So in the longer term interests of shareholders, shipping lines must come together and start a dynamic yield process that enhances the gross earnings by at least 200 dollars per TEU. 100 Dollars by levying a surcharge on Heavy Duty Containers, 100 Dollars for the excess load [which ends up burning more fuel] and lowering free time. Also indirect subsidy for repairing containers must stop. If the loading and unloading of metal scrap, metal rolls damage the floor of the container, the repair bill for the same must be borne either by the shipper o the consignee.
Business leaders must shed the myopic vision of loss of bookings for 3 to 4 months and look at the longer term benefits over a 5 year time horizon. If it means letting go of some bookings for the short term so be it. How much can any competitor absorb given the demand for such containers. At some point of time, there is bound to be excess demand and short-supply in this regard. Lion-hearts in the leadership team are needed for this and shareholders, tax payers and all critical stakeholders in shipping lines will eventually punish weak profitability rather than sheep-hearted leaders who follow the 'herd'
The other major area of revenue leakage is Console Cargo segment. Consolidators are just preying on carriers as well as shippers and taking in a lion's share of the pie. The freight rates for console cargo should be significantly raised along with service prices for documentation of console cargo. Consolidators must remember that both the asset owning carrier and NVOCC need to have a fair share of the console pie segment. Nobody is stopping consolidators from making a killing in that business but gains from such trades need not be at the expense of shipping carriers. Shipping lines equally deserve a share in the pie because it is the shipping line that actually makes it happen.
Pricing needs to be dynamic and segment based as well. Freight, THC, Documentation all needs to be higher for console cargo segments. By shipping lines taking this step in unison, it will send a strong message to the consolidators that they need to be more prudent with their freight procurement rather than take it for granted that shipping lines will bow to pressure and help consolidators grow at expense of shipping lines. This will also change the equilibrium dynamics of shippers who tend to use consolidators for 8 to 10 CBM of cargo as well. The idea is to entice shippers having 6-8 CBM cargo or more to go for a regular FCL shipment than LCL shipment [currently the equilibrium still lies between 10-12 CBM depending on the commodity] LCL Consolidators are needed for sure and they need to have multiple shipments of 5 CBM cargo or less.
Yes these measures are challenging status quo significantly but that is exactly the order of the day. Last but not the least, I would reiterate the same message that I had put forth in December as well. Shipping lines must collectively ensure a level playing field in the asset itself. the current scenario gives an unfair advantage to shipping corporations using fleet more than 25 years old over shipping corporations using fresh and young fleet below 15 years of age. With more and more young and efficient fleet being inducted at relentless pace, it is important that shipping corporations lobby at the right places to ensure that fleet older than 20 years old are out of the system completely for international trade. Otherwise the glut of ships will continue, the unfair advantages will continue and competent carriers doing the right thing by providing high quality vessels get raw deal due to the higher costs they incur and give an unfair advantage to shipping corporations in the Med region who use vessels as old as 35 years with near zero depreciation costs and higher profitability.
Quality comes at a cost and this cost needs to be realized in the form of financial gains. Unfair advantages caused due to system nature should be countered with aggressive lobbying as the majority lies on the quality fleet side and just one major carrier on the unfair advantage side!
So I hope that this message trickles to the leaders in the shipping industry and I would be more than happy to contribute the Game Theory aspects on getting this done for interested shipping carriers. Things will not change overnight but there is a larger game at play as usual; the situation seems depressing with no light at the end of the tunnel for shipping lines at the moment. If the game is played well, the situation is still not as depressing as bears in shipping markets including ship brokers are pointing out towards. The game if well played can turn the tables in favor of shipping lines over a period of 3-5 years.
Your Logistics and Profitability friendly analyst.................................
The so-called peak season surcharge will dwindle as time passes by and there will be little differentiation between peak and lean season charges as the market continues to have excess capacity. Today there are major revenue leakages for ocean carriers vis a vis weight and console cargo.
Weight Restrictions: Typically these are the metals and scrap linked clients who simply tend to overload the containers. Just because they provide base volumes, most carriers have been extremely lenient on these customers in quest for volumes. Business dynamics have changed and it is extremely critical that businesses pay for what they use. In the earlier days, when freight was on the higher side, the leniency was justified but not anymore. Metals and Scrap create a lot of damage to containers and hence make them under-utilized over the span of 1 year [if the average utilization for 20' containers is about 5 times for general cargo, it tends to be a shade below 4.5 or so for metals and scrap related containers!!!]
Moreover, these commodites apart from Granites, Marbles and Stones demand a significant share of Heavy Duty containers. Heavy Duty containers should attract at least a 100 dollar premium over regular containers. Also the fuel surcharge must be higher on heavy duty containers. Yes it is challenging the status quo that was there for almost 40 years now. Shipping Lines must also remember that the Baltic Dry Freight Index is at lifetime lows adjusting for inflation and hence, the status quo must be challenged. Every innovation or best practice will challenge the status quo and that is how industry standards change. Had Sealand not challenged the status quo of Bulk Shipping, then we would never have containerized shipping at all!!!
Also, the free-time awarded to such commodity corporations is significantly high. Yes, granted that the Steel industry is going through its cyclical downturn as well but all businesses are run for profit. Do these companies compromise on the freight rate for trucking ore or for that matter trucking the container loads to the port? Obviously not because diesel price deregulation and steady wage bill increases force people in the business to accept the higher costs. Yes all shipping lines have the tendency to say 'Yes, we would like to have this but who will bell the cat???' It is critical for shipping lines to come together on this issue and collectively raise the bar [as is done for BAF, CAF levies]. Volume share without Yield Management is futile and unhealthy for the longer term.
State run shipping lines can afford to play such under-pricing games at the expense of the tax payer but private corporations answerable to share-holders cannot. So in the longer term interests of shareholders, shipping lines must come together and start a dynamic yield process that enhances the gross earnings by at least 200 dollars per TEU. 100 Dollars by levying a surcharge on Heavy Duty Containers, 100 Dollars for the excess load [which ends up burning more fuel] and lowering free time. Also indirect subsidy for repairing containers must stop. If the loading and unloading of metal scrap, metal rolls damage the floor of the container, the repair bill for the same must be borne either by the shipper o the consignee.
Business leaders must shed the myopic vision of loss of bookings for 3 to 4 months and look at the longer term benefits over a 5 year time horizon. If it means letting go of some bookings for the short term so be it. How much can any competitor absorb given the demand for such containers. At some point of time, there is bound to be excess demand and short-supply in this regard. Lion-hearts in the leadership team are needed for this and shareholders, tax payers and all critical stakeholders in shipping lines will eventually punish weak profitability rather than sheep-hearted leaders who follow the 'herd'
The other major area of revenue leakage is Console Cargo segment. Consolidators are just preying on carriers as well as shippers and taking in a lion's share of the pie. The freight rates for console cargo should be significantly raised along with service prices for documentation of console cargo. Consolidators must remember that both the asset owning carrier and NVOCC need to have a fair share of the console pie segment. Nobody is stopping consolidators from making a killing in that business but gains from such trades need not be at the expense of shipping carriers. Shipping lines equally deserve a share in the pie because it is the shipping line that actually makes it happen.
Pricing needs to be dynamic and segment based as well. Freight, THC, Documentation all needs to be higher for console cargo segments. By shipping lines taking this step in unison, it will send a strong message to the consolidators that they need to be more prudent with their freight procurement rather than take it for granted that shipping lines will bow to pressure and help consolidators grow at expense of shipping lines. This will also change the equilibrium dynamics of shippers who tend to use consolidators for 8 to 10 CBM of cargo as well. The idea is to entice shippers having 6-8 CBM cargo or more to go for a regular FCL shipment than LCL shipment [currently the equilibrium still lies between 10-12 CBM depending on the commodity] LCL Consolidators are needed for sure and they need to have multiple shipments of 5 CBM cargo or less.
Yes these measures are challenging status quo significantly but that is exactly the order of the day. Last but not the least, I would reiterate the same message that I had put forth in December as well. Shipping lines must collectively ensure a level playing field in the asset itself. the current scenario gives an unfair advantage to shipping corporations using fleet more than 25 years old over shipping corporations using fresh and young fleet below 15 years of age. With more and more young and efficient fleet being inducted at relentless pace, it is important that shipping corporations lobby at the right places to ensure that fleet older than 20 years old are out of the system completely for international trade. Otherwise the glut of ships will continue, the unfair advantages will continue and competent carriers doing the right thing by providing high quality vessels get raw deal due to the higher costs they incur and give an unfair advantage to shipping corporations in the Med region who use vessels as old as 35 years with near zero depreciation costs and higher profitability.
Quality comes at a cost and this cost needs to be realized in the form of financial gains. Unfair advantages caused due to system nature should be countered with aggressive lobbying as the majority lies on the quality fleet side and just one major carrier on the unfair advantage side!
So I hope that this message trickles to the leaders in the shipping industry and I would be more than happy to contribute the Game Theory aspects on getting this done for interested shipping carriers. Things will not change overnight but there is a larger game at play as usual; the situation seems depressing with no light at the end of the tunnel for shipping lines at the moment. If the game is played well, the situation is still not as depressing as bears in shipping markets including ship brokers are pointing out towards. The game if well played can turn the tables in favor of shipping lines over a period of 3-5 years.
Your Logistics and Profitability friendly analyst.................................
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