by Kris Kosmala, Vice President, APAC, Quintiq
As world affairs go, the recent Global Liner Shipping conference in London did not stir up much interest in the global news cycle. The Panama Papers were still dominating the headlines, competing against the open scrutiny of British politicians’ private lives and endless discussions surrounding Brexit.
Every presenter at the conference had to acknowledge that the going is tough and one should not expect much change in the near future. What was even more interesting was the difficulty in finding much understanding of and sympathy for the carriers. Could it be that everyone is somewhat confused about what is really going on?
Are we in denial or simply optimistic?
There is an impression that everyone, except shippers, placed bets on a speedy recovery from the financial crisis and is afraid to pull out of the game. Global trade is not cooperating and there are signs that recovery is going to be painfully slow and very uneven. Yet, carriers are still talking up their new ships and cheering every uptick in container rates that are already below cost levels, noisily celebrating this as a prelude to an economic spring.
This collective amnesia ignores the fact that the economic supercycle has slowed, lighting fires in the overstretched balance sheets of carriers and the banks behind them. The commentaries make it clear that carriers did not see this coming and are still pretending that the tough years ahead will last only a few weeks.
The China effect
This irrational behaviour continues in light of a three-year effort by the Chinese government to telegraph in no uncertain terms the switch from a manufacturingto service-based economy. Allowing GDP growth rate to slip towards six per cent, whether by design or circumstance, is the clearest confirmation of their long-term economic strategy. It should not surprise anyone to see growth dipping below six per cent before picking up again on the strength of consumption spending.
This is driven by the fact that China will continue to rationalise resource-based and resource-dependent industries. Expect further reductions in capacities and workforces across mining, metals production, heavy industrial equipment, ship building, and many others. This is not the kind of news that drives consumer confidence up in the short and medium term, but eventually the outlook will become positive and confidence will return.
However, this is not what we are hearing from carriers and cargo forwarders. Their forecasting of financial results is still based on the return of China as the factory of the world. And that return has to happen over the next two years, because that is when a huge tranche of massive containers and bulk ships are going to be delivered. What a shame it would be if cargo volumes are not here to fill their holds.
The price we have to pay to keep the industry afloat
Carriers are reaching the point where their marginal revenues are falling behind the rate of increase in their marginal cost. Signs of commoditisation are visible left, right and centre. The proverbial carpet of profits is being pulled from under the carriers’ financial feet. Governments and banks have to be prepared for further interventions and cash injections. Some long-term liabilities might forever remain unfounded, creating financial overhangs like those we’re seeing with Hyundai Merchant Marine (HMM).
It is in nobody’s interest to see any of the major carriers fold, as that would have a huge impact on the global supply chain. However, the financial stress cannot accumulate forever. Could there be a solution to the dilemmas faced by the carriers and their customers? If banks and regulators want to see healthy maritime shipping, then they need to perform their own analysis of global shipping alliances. They need to help carriers rebalance the alliances to survive the downturns and benefit from the upturns.
Greater involvement from within – the key to salvation?
At present, alliances are created and modified in response to regulators asking the liners to meet the needs of the markets under each regulator’s watch. Global view is lost in siloed financial analysis or some underlying narrow views of the benefits to the economy local to the regulator. The same goes for the banks. They cannot remain on the sidelines, simply extending financial terms and worrying about the value of the assets underlying the loans.
Whether there is a desire to get deeply involved in each carrier’s strategy remains to be seen, but there is no reason not to consider it. This is not a call for more regulation or oversight, merely for more advice on business strategy. At the moment, that advice might be coming from people without stakes in the outcome – management consulting companies. Their advice to individual carriers to either buy growth or cut costs has not produced well-balanced shipping companies. An alternative view could spur different thinking. Let this be the optimistic angle of this article.
About the Author
Kris Kosmala brings many years of extensive global experience as a business operations executive in the services and technology industries. He is currently responsible for the Asia Pacific region in Quintiq, a software company specialising in development and provision of advanced supply chain planning and scheduling software. Armed with many years of experience, Kris has worked on innovative projects harnessing information technology to increase revenues, optimise utilisation of assets, and reduce operating costs.