The Big-Box Game

Since the crisis, the shipping industry knows a recovery that has not lifted ‘all boats equally’. The demand for oil tankers increased drastically due to a combination of weak spot prices and expected higher future prices. Since the Chinese demand for commodities as iron and coal has increased significantly, also bulk carriers has to deal with enormous overcapacity. But since the industry is hit by a decrease of oversees trading, the freight rates has decreased almost by 50 percent. When the third quarter figures were published, Maersk the biggest container line, told investors that there probably will be a fall in profits. The worst part is that ship owning firms started to increase their amount of ships which led to a 60% higher demand for new container ships than the year before (in the same period). This adds up to the industry problems because all the extra capacity will only drive the freight rates lower. On the other hand the firms that can afford it, have an advantage by ordering bigger new ships since the freight rates are falling and there are still sizeable economies to be gained from increasing the capacity. This is a problem for the smaller shipping firms who are not subsidized by their state. Some smaller operators (particularly in Japan and South Korea) and also the smaller container suppliers face bankruptcy due to the ‘big players’ in the industry. Since the container ships are only getting bigger the ports are facing also the risk of not having enough capacity to handle them. Also here the smaller ports are losing direct connections and the bigger ports are investing seriously in upgrading their infrastructure. What does all of this mean to us, the consumers? As we learned, every aspect or process on the supply chain of the logistics has an influence on the consumers. The consolidation of the industry with bigger but less container ships, shipping off to bigger but less ports would result in a more efficient way of oversees transporting, which means lower costs. The consumers will benefit from this because lower costs will only result in lower prices of the final goods. But on the other hand, if only the ‘big players’ in the industry are left they can form an alliance, which is already happening. This could result in low competition or even no competition, meaning a monopoly. Forming an alliance, the firms can force the freight rates to go up again. Concluding that cheaper freight rates are for now beneficial to the consumers but with the risk that it won’t last for long.

By: Milàn Klaver

Source: The Economist


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