As container lines face a huge surplus of equipment Richard Butcher, Managing Director of Global Equipment Management, writes that it's ‘time to start thinking outside the box’.
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 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.
To read more in the Seatrade Maritime News click here.