Posted on 05-17-2017 by Lucia Garza
The shipping industry is coming out of one of the roughest patches in recent memory — and still faces a multitude of complex challenges in the years ahead.
According to BIMCO, 2016 was particularly harrowing for the dry bulk shipping industry. Early in the year, the Baltic Dry Index (BDI) — a key sector benchmark — hit an all-time low. Although the BDI recovered somewhat by the end of the year, BIMCO argues that “scrapping ships and refraining from building new ships is essential” if the shipping industry is to return to profitability by 2019. Even as shipbuilders continue to take new orders, BIMCO estimates that the industry needs to shed some 30 million dry weight tons (DWT) of shipping capacity.
“scrapping ships and refraining from building new ships is essential” if the shipping industry is to return to profitability by 2019 – BIMCO
Consolidation and Alliances: Good for Shipping Companies, Not So Good for Customers?
Shipping companies have long used alliances and consolidation (mergers and acquisitions) to fight overcapacity and preserve margins; in the current shipping environment, they’re shifting these tactics into overdrive. According to McKinsey, shippers “have not only reshuffled these alliances on a larger scale than ever before but also consolidated in an unprecedented flurry of deals” since 2014.
Consolidation and alliances create economies of scale that drives down shipping prices. That’s theoretically good for shipping customers, who are more than happy to pay less.
Consolidation and alliances create economies of scale that drives down shipping prices. That’s theoretically good for shipping customers . . .
However, per Supply Chain DIVE, lower prices accelerate the “commoditization” of shipping, wherein the level and type of services offered by major shipping lines converge and shipping customers are no longer able to differentiate meaningfully between each alliance or company’s offerings. Over the medium to long term, says Supply Chain DIVE, “when prices stabilize, all of the differentiation of product has been removed, and a majority of shipping lines have consolidated,” shippers may have no choice but to pay more for inferior service — think of the airline industry. Disturbingly, Supply Chain DIVE evokes OPEC, the quintessential commodity cartel, to underscore its point.
Commoditization: Bad for Shipping Companies Too?
There’s some reason to believe that this peril is overstated. McKinsey’s piece illuminates the “prisoner’s dilemma” that’s quickening the drive to commoditize: with fewer (but larger) players left in the global shipping space, each entity falls over itself to follow the other’s lead, creating a herd mentality characterized by an absence of rational decision-making.
In other words, as shipping conglomerates and alliances converge on a sub-optimal service portfolio that frustrates rank-and-file shippers, they actually lose competitive advantage over one another. Over time, that actually increases incentives for innovative shipping companies to find ways to buck the commoditization trend and offer premium service — even if that requires shippers to pay a small premium themselves.
The question is, which shipping firm or alliance will recognize this first? Or will it take a disruptive force to shake up the status quo?