Thinking outside the box

For shippers to work most effectively, especially in these difficult times, they need access to information. Advance notice of proposed legislation or an expert opinion on an industry issue can make all the difference when crucial decisions need to be made. To help shippers (exporters, importers, manufacturers and wholesalers) find that information, www.shippersvoice.com has been established. One of the latest issues discussed on the site is “ It is time to break the cycle of boom and bust - but who is brave enough to think out of the box?”. We ask Dr Andrew Traill, Managing Partner of Shippers' Voice, to give us a summary.

Journalist: How close to the lowest level of the boom and bust cycle are we?

Dr Traill: Trade statistics released by the Shippers’ Voice recently paint a somewhat gloomier picture of the global economic recovery than some other recent indicators have suggested. Trade data collected over the past 14 years by Shippers’ Voice partner MDST, forecasts that volumes of goods traded internationally (measured as TEUs) will only marginally increase in the second half of this year, with a slow improvement from the second quarter of 2010.

The forecast predicts that shipping lines will not see a return to Q3 2008 volume levels for at least two years. Then, given the absence of any global traumatic events, we should see a steady if unimpressive 4-5% growth rate of trade globally.

Journalist: So what will carriers do with all that new shipping capacity coming onto the market?

Dr Traill: Container lines are being hit from both sides.  The yards building the ships are, understandably, not keen to delay deliveries  – and therefore payment. And, shipping lines continue to find it extremely difficult to persuade shippers to pay higher rates in times of excess capacity. It is hard to see how a massive supply and demand imbalance will not last for years.

Journalist: How does the oil price affect the situation?

Dr Traill: It is somewhat ironic that part of the reason behind the recent oil price rises (at least up to the time of writing this article) is the sense of growing optimism that the recession has reached its worse point and things can only get better. According to Infin Management’s Kelvin Seddon, writing for The Shippers’ Voice, “the figures so far show we are crawling out of a recession and the recovery is still showing some shaky foundations”.

Furthermore, it was the high price of oil that reduced the amount of available cash in the consumers’ pockets, that exposed the scale of bad debt and was the catalyst for the financial crisis. Higher oil prices could see even the faintest of glimmers of economic recovery quickly snuffed out. Shipping lines seem caught between a rock and a hard place at the moment.

Journalist; So what can shipping lines do?

Dr Traill: I would ask ‘what are shipping lines AND shippers to do?' We need to recognise that it is a problem for all of us.

Shipping lines seem reluctant to lay up ships. We have seen an attempt to introduce rate hikes. But it has become all too apparent, as was recently explained to me by a shipper, that “the lines decided to fight for the freight they had and continuously undercut anyone that looked like they could threaten their market share”.

Shippers that think they are in this for the medium term at least (those not absolutely focussed on just staying in business) should be getting worried at this situation. Few companies will go out of business just because the costs of shipping are too high; but businesses will certainly fail if they cannot get their goods to market at all because the lines have withdrawn so many services or indeed themselves gone out of business.

If prices are driven down to silly, uneconomic levels, the lines will not be able to survive in their current number and guise, and the shippers will suffer for the short term if /when we do get the much talked about recovery. Word is that the lines are beginning to regret undercutting each other so fiercely: in efforts to cut costs and fill ships, many lines are slow-steaming, cutting port calls and removing more services. I have heard it said that some are now starting to suggest that for those with very low rates they will not be guaranteed space on the ships and services that remain; “But what do they expect us to do when they themselves are the ones offering ludicrously low rates? I cannot turn them down and ask to pay more!” remarked one shipper to me on this matter.

Journalist: How has the abolition of conferences affected shippers?

Dr Traill: The liner industry is in a better place without conferences and can now act like a proper business, getting closer to and understanding their customers in order to shape business strategy.

Shippers must capitalise also on this new environment. For example, they should attempt to gain favour with preferred carriers and show that they are serious about sustainable rates for sustainable services. In other words, get the lines to look with them at the door-to-door costs, the supply chain needs and pressures on them to cut costs, and to help find well-costed solutions and give longer term contracts (with all the KPIs required). Fair pricing should result in the creation of loyalty in the longer term, which itself leads to stability.

It is a radical thought and there are many on both sides that will argue that this is not possible, that their hands are tied or that the carriers and many shippers are not interested in working like this.

Journalist: Can carriers and shippers really work together?

Dr Traill: One shipper I questioned wondered whether the carriers were yet able to start acting as true independent businesses: “The end of the conference system is a good start, but still carriers may not be used to going it on their own yet.” Another shipper thought it naïve to expect loyalty in a globally competitive market. He said: “As a shipper with years of experience, I have never witnessed a line support my loyalty - they may say all the right things but when the market is hot the lines have very short memories of who supported them in the tough times.”

This was echoed by other shippers who, based on past experience say: “Whenever rates are going up, shippers look for long term cooperation but carriers want nothing to do with it. They try to increase rates as fast as possible and as high as they can go.”

When it comes to the matter of accepting higher, sustainable rates, the following comment from a shipper adequately sums up the dilemma faced by most shippers around today: “As a shipper (buyer), it is hard to explain to internal stakeholders why there is a need for 50%-100%-200% increases almost overnight when there has been little or no change in service or transit times. Business models can accept 3-5 % swings in prices based on real economic factors (inflation, CPI, etc) but when carriers start demanding 50-100% increases, the market has little sympathy when things start to go the other way.”

These reactions do little to suggest there is much desire for change. Again as the veteran shipper referred to previously stated: “The market should and will decide rate levels. If carriers go out of business that will help take out capacity and stabilise rates. I don't see a risk that shippers will not be able to get goods to market - if there is a demand there will be a supply.” Another shipper said to me, “this is the nature of a free market – the ones with the deepest pockets or the most innovative and ability to change to the circumstances will be the survivors.”

Journalist: So can we break the cycle of boom and bust?

Dr Traill: Surely, if shippers are able to agree sustainable rates, and carriers improve the service and find ways to reduce their costs and those of their customers, this might help break the vicious cycle of boom and bust that prevails, and keep the lines in business without too many casualties. The choice of carrier will be greater, the competition more effective, the rates more competitive. There are some shippers that do say “It is time for a new start… It is time to bring a new sense of logic into this industry.”

One such shipper remarked to me “Shippers are looking to partner with carriers that have solid financial backing and long term sustainable business models. That means open book communication as well as one on one dialogue and sharing of information. Volume will flow to these carriers (best prospects) as it is not so much about low price any more.” “Staying close to your customers in future, at all times, is the way to survive and prosper; this is something the lines have arrogantly failed to do in the past, but they will have to change in order to ride out the storm” commented another.

It is a huge gamble; but isn’t it time for those that believe in this new cooperation to take a stand and take the lead?

It is my view that new thinking, new strategies, and new models are where the best chances of prosperity in the future rests. According to one shipper, “Carriers that can lead the way down this path will most likely be able to survive this mess.” I think it is time for everyone to start thinking not simply “outside of the box” but “well beyond the box”.