Shippers ‘must adapt their ocean contract strategy’
International transport and logistics executives using container shipping are facing the biggest shift in their ocean provider base for 20 years due to rapid consolidation among carriers, cuts in vessel orders, and new tender technology, requiring shippers to adapt their procurement and contract strategy, according to ocean freight procurement consultancy Drewry Supply Chain Advisors.
In the last five years, beneficial cargo owners (BCOs) have been able to secure large reductions in freight costs by running traditional competitive bids with numerous providers in an over-supplied, fragmented market, Drewry noted.
“Today’s business environment is starkly different, so we are now pro-actively advising our BCO customers that last year’s contract strategy will simply not work as a blueprint for the forthcoming annual ocean tender,” said Philip Damas, head of Drewry’s logistics practice. “Things will be different and organisations must be prepared.
“Rapid consolidation in the supplier base, changes in supplier behaviour, huge reductions in vessel orders and new developments in tender technology will bring real change and uncertainty to the ocean transport procurement environment,” he added.
For example, on the Asia-North Europe route, the number of containership operators (excluding slot charterers) will decrease from 15 in July 2016 to 11 in July 17 to just 8 in July 2018. Globally, in 2016, orders for new containerships decreased from US$17 billion in 2015 to US$2 billion in 2016, he noted. On the other hand, the capacity of new containership deliveries is expected to increase from about 900,000 teu in 2016 to 1.1 million this year.
Meanwhile, the bankruptcy of Hanjin Shipping in 2016 has highlighted the performance risks of some financially weak providers and some BCOs and ocean carriers are experimenting with new contractual models, Damas added.
Annual contracts being renegotiated on the Asia-North Europe and Asia-US West Coast routes are typically seeing container annual freight rate increases of about 50% – although from a low base, Drewry noted.
In such a market Drewry believes that BCOs will need to re-think their contract negotiation strategy and believes that, by incorporating benchmarking and e-sourcing best practices in their tender management process, rate increases can be mitigated.
“Use of big data and optimisation can also help find the best combination of bids to meet the intended balance between cost and service for the BCO’s many different lanes or supply chains,” Drewry added.
“BCOs could also face more frequent potential issues from roll-overs and cancelled sailings in the medium term. In early 2017, European exporters suffered shortages of export shipping capacity to Asia, at a time when quarterly volumes to China were running 18% higher than in the first quarter of 2016.”
In a separate recent analysis note on Hapag Lloyd’s recent financial performance results, Drewry Maritime Financial Research said Hapag Lloyd’s bargaining power had improved significantly due to its membership of The Alliance, which started operations on 1 April, and this would help its financial performance over the rest of the year. “This new alliance, along with the increased level of consolidation more generally seen in the industry, has returned the bargaining power to the liner operators,” said Drewry.
“We hear that, whereas last year, many shippers would decrease their contracted volume – say to 75-80% – and ship more on the spot market to take advantage of lower rates, this year, more shippers are increasing their contracted volumes again to secure rates, space and create some consistency.”