Transportation & Logistics Analysis

Ship size and speed will be crucial after the Covid crisis

April 23 2020

The coronavirus epidemic has highlighted the need to change the container shipping model even if it is true that it was already malfunctioning. Introducing mega container vessels and then slowing them down to reduce overcapacity now looks like a strategy that is bound to fail.

"Need for Speed"…This is not just the name of a motor racing video game which has come back into fashion in this period of lockdown. The phrase also fits the container shipping market perfectly. The market must absolutely consider accelerating ship speeds to prepare for the resumption of operations after the coronavirus epidemic. For the time being, however, it remains static, as it continues to cling to its sacrosanct yield management software.

This approach, which combines an elastic approach to the management of available space in real time and the optimisation of ships' load factors in line with the best possible TEU formulae, is perfectly good practice in "normal" operating conditions. Is it really the right way to function, however, in the crisis we are currently experiencing?

Freight rates on life support

We are seeing that in order to maintain freight rates, which are on life support, at relatively high levels, or at least at levels higher than they should be in relation to the natural relationship between supply and demand, shipping companies seem to have no other choice than to reduce capacity to the point that they prevent the market working. The deliberate withdrawal of capacity totalling more than 3 million teu on East-West routes has caused the entire business machine to seize up, putting a brake on any attempt at recovery and without preventing freight rates from slowly declining even so, as is starting to become evident.

This comprehensible approach on the part of the shipping companies, which can be described as "hyper-defensive", is a clear reflection of their inability to come up with alternatives requiring greater agility on their part. In the current situation, the giant 20,000 teu-plus container ships coming into the market have suddenly lost their aura as wonderful transport machines of the future and become inert steel colossuses, which are at once cumbersome and unwieldy.

Unwieldy giants

What is happening today was predicted somewhat arrogantly by a former Maersk group CEO, who expressed the view that other operators racing to build ever bigger ships were behaving suicidally. The facts are in the process of proving him right. The ship charter market, which is a good indicator of the size of ships required by the market, is offering rock-bottom rates for giant container ships which are no longer finding takers. Conversely, the 7,000-10,000 teu segment is performing remarkably well despite the crisis.

No one can yet say whether, in the medium and long term, Western imports of Chinese goods will grow, stay level or diminish. There are some warning signs, however. The Covid-19 epidemic has suddenly highlighted the dependence of Western, and particularly European countries, on Asian suppliers. The shock has been such that it is difficult to imagine a return to life as it was before. Particularly since "nearshoring", which involves reducing the distance between places of production and places of consumption, had already begun progressing before the crisis. This process could now accelerate, even in sectors producing non-essential products where operators are concerned to avoid the risk of a supply breakdown.

Matson - lessons from an outsider

Faced with the strategy of supply-side contraction which is being widely followed by all the leading global shipping groups, it is interesting to look at the radically opposite choice made by US market outsider Matson. The group, which is active in the United States and in the trans-Pacific market, where it has a good reputation even if it is often wrongly considered a secondary operator alongside the Big Three, decided to speed up its ships as part of a partnership with world container groupage number one Ecu Line.

Taking the opposite direction to the market, Matson piled into the breach opened up by the destabilisation of the trans-Pacific air freight market. It has dared, innovated and proved that middle-sized ships are a great card to play when very low sulphur fuel oil (VLSFO) is selling at nearly half the price budgeted for by the shipping companies for this year.

Beyond the question of the pertinence of the market into which Matson has opportunely taken the plunge, its attitude has sent a double message to clients and final consumers, namely:

  • that it is capable of coming up with new solutions to match adverse conditions
  • that it is focused on the fundamentals of its business, the ultimate aim of which is to make money on the sale of clearly defined maritime services with tangible added value.

The end of a model?

Are the big groups in the shipping Top Ten capable of "changing their software"? The big international freight forwarders say that, so far, there have been few examples of this happening…The large-scale laying up of nearly new ships, the widespread use of super-slow steaming and, for some, use of the Cape route as a means of deliberately lengthening transit time come across as an admission of strategy failure which is difficult to assume.

The weaknesses of the existing model were well-known but the giant resistance test represented by the coronavirus epidemic and the economic paralysis it has caused has intensified questioning over the model. What will become of the 20,000 teu-plus container ships if there is a long-lasting recession in the key inter-continental trades? Will they need to be reformatted as 14,000-15,000 teu vessels? Everything is possible. The drive for size has already resulted in major reversals. In the 1980s, in shipping, the giant 500,000 dwt ended their short working lives as floating storage tanks. More recently, in the aviation business, the first Airbus A380s are in the process of being dismantled.

The markets were delighted with the concentration and economies of scale that came with the giants. Today, however, they might well prefer the brave operators who take the opposite path, using speed and acceleration to demonstrate their dynamism and reactivity.

Could the nascent new era mark the arrival of "Small is beautiful"? Will container shipping's Big Three be agile enough to transform their mode of operation. We should have the beginnings of a response regarding the industry's new business model in the second half.

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Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).
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