Transportation & Logistics Analysis

What should shipping companies do with their exceptional profits?

June 03 2021

Ocean freight rates have stayed at astronomically high levels for longer than expected on all the major trade routes. The shipping companies are generating exceptional revenues and these can help them to respond to a number of challenges.

The well-tried method of clinically adjusting capacity to match demand is working marvellously. The discipline among carriers this involves had already been seen before the Covid-19 pandemic, as the container shipping companies tried to limit their then colossal losses. What was then a defence mechanism has since become a terribly effective weapon for reversing the balance of power in a market heavily marked by supply chain disruption. Since the post-Covid era is not yet in sight, the companies are continuing to sing from the same song sheet.

After the financial catastrophe of 2019, the shipping companies did well financially in 2020 and the outlook for 2021 promise to be just as good, as e-commerce continues to stimulate demand for goods from Asia in all markets.

What are the shipping companies going to do with their exceptional revenues, taking account of the fact that shipping is a capital-intensive industry which is more at home with long-term management? Several options are available and it will be interesting to see in the months and years to come what choices the companies make.

1 / Debt reduction

We tend to forget it today but the big shipping companies have debt levels which are generally higher than the norm after decades of financial struggle.

The current situation provides them with an opportunity to refinance their debts and so obtain better notes from the financial ratings agencies. These are essential if they are to borrow more easily in future and thus finance new investment. Governments, which were directly or indirectly called to the rescue when business was bad, can now catch take some time to get their breath back!

2 / Digitalisation 

The current state of the market has accelerated the digital revolution which had been struggling to make its mark in an industry which is relatively conservative. With FAK rates offered on a take-it-or-leave-it basis, customers are now invited to make their reservations directly by Internet without telephone or face-to-face negotiations beforehand. The shipping companies have the means, therefore, to invest in higher performance digital systems.

The new booking procedures should lead to longer term consequences and have a significant impact on the organisation of sales departments. Commercial relations with major clients will always involve personal contact but the old profession of “freight hunter” looks likely to disappear and the personnel who carry out this work need to prepare themselves for this change.

3 / Energy transition

The shipping companies should speed up the greening of their fleets so as to be able to comply with the greenhouse gas reduction targets set by the International Maritime Organisation for 2030 and 2050.

The funds now available will stimulate the promising research which is already under way.

  • In the short term, the number of flexi-fuel vessels using LNG + Marine Gas Oil is going to continue to increase.
  • In the medium-term, ammonia-MGO flexi-fuels, which are cleaner than LNG, should emerge.
  • In the longer term, hydrogen is another possibility for the shipping industry. It will need to be produced using renewable electricity, however, and stored otherwise than as a pressurised liquid to get round the problems currently posed by large-scale hydrogen use.

The shipping companies have understood that they are going to have a major impact on their customers carbon performance. Climate bonds offering rewards for low emissions are clearly going to be a major market in future even if, at this stage, they are still in their early stages.

4 / Value chain integration

In order to secure their commercial relationship with their clients in the long term, it is in the interest of the shipping companies to continue the process of value chain integration they have already begun. This means bringing together port terminal management, container manufacturing and repair, the development of logistical facilities in and outside ports, inland transportation and forwarding. The shipping companies' current good financial health offers them the opportunity to develop this strategy.

The traditional international forwarding groups will need to expand to stay in the game, moreover. We can see this process at work in the DSV group, which has taken over Panalpina and, most recently, Agility.

5 / Market stabilisation

Current freight rates could whet the appetite of would-be new operators in container shipping. For now, there is no room at the shipyards, since the orders placed by the big three alliances are using all available capacity.

The risk that a new operator will arrive and destabilise the market is, therefore, under control, particularly since the existing operators have taken up most of the capacity available on the ship charter market even though it means that some vessels are being under-used.

6 / Making the industry more attractive

Shipping companies' shore staff are not well served in the fields of training and professional qualifications and recognition. Now that they are more at ease financially, the companies should speed up the process of improving skill levels and making better use of their potential. It also offers a unique opportunity to make the shipping professions more attractive and enable them to attract the high profile individuals the sector needs.

Clearly, seafarers and port workers should not be forgotten in this internal reorgnisation process. The recent breakdown in negotiations between seafarers' and shipowners' representative bodies is clearly not a good sign in this respect, however. Working conditions deteriorated seriously during the Covid-19 pandemic because of difficulties replacing crews. The International Transport Workers' Federation has warned that many seafarers are considering leaving the industry, which could lead to it facing a labour shortage.

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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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