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Industry Insight

Shifting Legacy Maritime Culture through Operational Management, Transparency, and Digital Transformation, Part 2

During our first segment of this multi-part discussion on transforming the maritime industry into a better version of itself, we began with contextually framing with industry cycles and how history often rhymes with itself.  Legacy operations often suffer repeating actions despite evidence that such methods don’t advance the organization or industry.  We continue this week by recognizing that industry may be performing the same cyclical patterns as before.

For reference, let’s sample supply capacity of container vessels and discuss the cause and those consequences.

Increased Container Vessel Supply Capacity

At the beginning of 2020, the world fleet consisted of 98,140 commercials ships of 100 gross tons, the equivalent of 2.06 billion deadweight tons. In 2019, the fleet experienced an expansion of 4.1%, its highest growth since 2014. The fastest growth came from gas carriers, oil tankers, bulk carriers, and container ships, in that order. The size of container vessel capacity has also grown by 10.9%, with the largest container ships rivaling the size of ultra-large crude containers (ULCCs).

The fleet is now experiencing a boom of box ship orders. The pre-pandemic capacity-cutters are purchasing most of the new-order shipbuilding capacity. Operators such as Seaspan have ordered thirty-one vessels, a total of 451,000 TEUs (already signing 6- to 18-year charters). Hapag-Lloyd ordered six 24,000 TEU vessels (destined for Asia-Europe and Pacific routes). Evergreen and OOCL being the other large newbuild purchasers. Great news for the shipbuilding community. And perhaps an overall benefit, for now, is the reduction of older, less-efficient vessels replaced by larger, more energy-efficient, and environmentally cleaner vessels and technology.

However, the main takeaway here is the shortsightedness of management once again through the over-investment of new tonnage. As mentioned, the lag in delivery will be several years. At that point, the bull run may be over, then combined with surplus capacity, the cycle repeats itself. 

A sentiment not seemingly shared with top-level executives as demonstrated by Johan Sigsgaard, Maersk’s Head of Ocean Products, where he stated, “we expect rates will normalize at a level above historical.” Amplified by, “I do not expect rates to return to the low levels we’ve seen before the crisis, at least not anytime soon,” by Maersk executive Jochen Gutschmidt.  

Cause and Effect

As the average consumer hopes the transportation costs will relax, the result of lower future prices combined with an oversupply of capacity may trigger yet another shipping catastrophe. It’s a serious topic that demands a much broader conversation between stakeholders and management. However, the effects of the pandemic uncovered accelerated shifts in globalization patterns and supply chain designs, as reflected in lower trade-to-gross domestic product (GDP) ratios observed since 2008.

Overcapacity of vessels may soon be intensified as the Covid-19 pandemic has caused massive reassessments to global trade, particularly just-in-time (JIT) supply chain methods are conducted.  Many countries have been devastated by one-way trade imbalances during COVID are now accelerating the regionalization of commerce that focuses on resilience and robustness. The shortening of supply chains and redundancy (inventory and excess stocks) through investments of warehousing and storage, along with diversification in sourcing, routing, and distribution channels, is now proving vital for survival.  Proper risk management will move consumers away from a single country-centric location instead of sourcing multiple location sources. In addition, such efforts would stimulate competition that will drive down costs and delays.

Furthermore, new consumer spending behavior and technological advancements may upset the industry like never before. Post-pandemic consumption and shopping patterns now lean towards customized goods vs. mass-produced items. This trend may soon favor localized three-dimensional printing and robotics. These are novel concepts that have massive implications for the future of supply chains. Such considerations must quickly be addressed by management to future-proof shipping.  

As one can see, the complexity and intricacies involved with the global maritime trade are staggering. The accelerated and exponential rate of change is overwhelming. Given the importance of shipping to the world’s economies, today’s managers must remain vigilant and agile, but most importantly, self-aware.  

Please join us next week as we continue our journey of identifying areas of opportunity for improvements by addressing a major impedance to sustainability and market inclusion – corruption and transparency. We welcome and encourage comments, opinions, and shared experiences from both those in the maritime industry and those outside of it. Crowdsourcing of information and ideas is paramount to our mutual growth and sustainability. Thank you for joining us.

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