Transportation & Logistics Analysis

Shipping: If there had been no pandemic…

February 08 2022

Regular line shipping companies had been dictated to by the shippers for years and had run up heavy losses. The balance of power was suddenly reversed, however, by the Covid-19 pandemic and a return to pre-pandemic conditions now looks to be totally out of the question.

After an already very comfortable financial year in 2020, the big shipping companies are preparing to publish 2021 profits which will run into billions. Would the container shipping market have turned round in such spectacular fashion without the start of the worldwide pandemic in 2020 ? It is tempting to say no. Some sort of change of direction was on the way, however, given that the existing system was on its last legs and no longer viable in the long term.

Sudden change

In the years leading up to the pandemic, the shipping companies had run up heavy debts and had been forced to survive on cash flows that were tight to say the least. This had forced them to call their public and private sector shareholders to the rescue with emergency bail-outs. At the same time, on the demand side, we had doubtless got a little too used over several decades to having things our own way, as and when we wanted…and at the ridiculously low rates we demanded.

The sudden paradigm shift we have experienced raises the question as to whether it will last or not. Are the changes in fundamentals which have taken place over the last two years deep-rooted or will we return naturally one day, when the post-pandemic era finally gets under way, to the pre-pandemic "normal"?  

With negotiations on rates for one and two-year contracts under way, portentous questions are emerging. They will require strategy decisions which will involve shippers in long-term investments. These questions mainly concern the diversification and relocation of production, sustainability, the risk of negative growth and digitalisation.

In real life, virtually no business can can claim in the short term to be able to do without China and the Asian ecosystem, with its now long-standing, accredited and high quality suppliers, for its mass production.

New fundamentals

Apart from the sudden reversal of the balance of power which left the shipping companies in the driving seat following the drastic lockdown imposed by China in spring 2020, the latter made use of all the weapons at their disposal to take long-term control of the market in a way which puts them in a relatively impregnable position. So long as the shipping companies maintain discipline and demand remains strong, helped by an e-commerce which keeps demand at a constantly high level, no change of operating model can be envisaged in the short term. 

As they prepare their shipping budgets, the major industrial and business groups now have to accept that a service which cost them 100 on average on a pre-pandemic base of 100 now costs them 400 and is likely to do so for a long time to come. The pill is a bitter one to swallow when one considers that the shipping budgets of the biggest shippers are calculated in hundreds of millions of dollars. It is all the more bitter for the fact that the price hike applies to transit times which are twice as long as they were in the pre-Covid period, meaning that substantial and costly intermediate stocks need to be constituted to avoid the risk of shortages.

  • Digitalised customer relations

Before 2020, digitalisation was much talked about on executive committees but, on the ground, old habits persisted. The pandemic caused a mighty upset in all company functions, which affected the goods transport sector like all the others. Reservations about working from home were dropped, for example. The same happened in customer relations, which, in the B2B sector, had generally been little digitalised.

Taking advantage of the difficulty in getting access to shipping capacity, the shipping companies directed their clients to their digital booking services, where they could make their reservations with just a few clicks…at top dollar prices. It is highly intelligent to get clients to carry out the work previously done by an employee and get the customer to pay in advance for a service still to be carried out and of a quality which had not been tested.

Customers had no choice but to accept theses new methods. The shipping companies are rushing to bring this new digital sales model into operation and do away with the classic negotiating approach, which now belongs clearly to the past. From a legal point of view, it cannot be argued that they are refusing to sell their services, since anyone can reserve by Internet on the website of the company of their choice.

A return to previous negotiating practice now looks very unlikely. The change took place too quickly and too powerfully, and went too far for any return to the past to be possible.

  • Better use of capacity

For decades, the poor results of the shipping companies were systematically blamed on market overcapacity. But the companies understood that their capacities could be put to better use and not simply considered as space they had to fill at any cost to survive, as it was according to the concept which was dominant until the winter of 2019-2020.

Controlling capacity through the use of sophisticated optimisation software meant maintaining demand for space and thus keeping up prices. The companies are using all their capacity, which enables them to prevent new operators from coming on to the market, but the cargo flow dynamic has been broken. It has now become normal for ships to wait outside port or even at sea. Regular shipping lines are no longer regular, ships are slowed down and late cancellations of port calls has become normal, turning shipping lines into virtual floating storage units.

For all these reasons, and now also because of widespread port congestion, the shipping companies prefer to sacrifice cargo volume over a given period to keep rates high. The decision is a simple one. Current freight rates make up for the loss of cargo volume to a large extent, while keeping the capacity "elastic" taut in the long-term. This is exactly what we have seen this year in the run-up to the Chinese New Year.

The shipping companies have all the instruments they need to maintain this balance in their favour. It is for this reason, too, that any return to pre-pandemic conditions is difficult to envisage in the short term.

  • Uninhibited

A more psychological factor, which is nevertheless essential to an understanding of the current trend, also deserves mention. After having been subjected for years to the dictats of the shippers, the shipping companies no longer have any complexes.  

They are extending their activities, preparing a future which they see as profitable and more virtuous from an ecological point of view, and redistributing a large part of their profits to their employees. Cosco is the champion in this latter respect. It paid out an exceptional bonus, equivalent to 24 months of salary, to all its employees ! All these factors are enabling the shipping companies to become attractive again to young talents, which has not been the case since the 1990s. The sector was more used to redundancy programmes and restructuring plans than to bonuses. And for good reason. There were no profits !

The pandemic was the game-changer which the shipping companies had given up hoping for as they plunged, fragile and disorientated, into the Covid maelstrom. Although they were trying simply to survive, they went for broke and their poker-style bluff paid off beyond their wildest dreams.

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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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