How will the container shipping market evolve over the next decade? After having presented you with a first scenario based on the hypothesis of domination by China, then a second one focused on the rise of nationalist politics giving rise to a system of blocs in the maritime sector, we propose to bring to an end our speculative exercise that looks into the future on a more optimistic note. Our third scenario deals with an evolution that is centred around operators’ own economic interests and is less dependent on geopolitical uncertainties.
In this final part of our series devoted to the evolution of container shipping for the period 2019-2029, we will base ourselves on the assumption that block exemptions that shipping companies benefit from are renewed for a further 10 years from April 2020. We also build our reasoning on the presumption that trade relations between the United States and China have become relatively less conflictual, and that there are generally no significant tensions between the world's major blocs (including continental Europe).
These elements can certainly be considered as key factors in the evolution of container shipping over the next decade.
1/ Is the consolidation movement over?
This is THE big question that arises regarding the configuration of the market over the next few years. Large groups are now pretty well established, but their financial exposure is difficult to predict owing to market developments, especially on the Eastbound and Westbound routes where gargantuan is now the standard size.
The future of Taiwanese and Korean operators (EVG, YML, HYUNDAI) also seems to me to be one of the major issues for the coming years. One may wonder how much longer they will be able to remain "non-aligned" with the large structures, both financially and politically. On the European scene, an "old lady" such as Hapag Lloyd, despite being firmly anchored thanks to partnerships and reinforced by the UASC merger, could suffer financially due to a certain isolation. The company is not large enough to compete on a level playing field with competitors in major markets, but it is now too big to reposition itself as a niche player in its traditional "home" market, the Transatlantic.
2/ Is the model that integrates 3 PL and 4 PL relevant?
As is demonstrated by, among other things, the acquisition of Ceva Logistics by CMA CGM, the integration of maritime and logistics activities is on the agenda. The concept of a single point of entry is highly strategic for shippers.
This integration process requires large-scale investment in technology so as to meet the different standards required by shippers and their specific needs. To compensate for this investment the length of the contracts will rise (3 to 5 years). The banking sector, which has been reluctant to invest in container shipping because of the low return on investment over the past few decades, may now be able to finance the activity at a lower cost, thanks to this better visibility.
This longer-term vision is essential for building real partnerships based on an industrial point of view. Today, the containerized shipping line industry is inherently very opportunistic and focused on short-term profitability ratios. This situation is detrimental to the sector because it generates a process of permanent bargaining that is not conducive to the creation of a long-term efficient designated organization.
3/ Is there a place for newcomer "troublemakers" like Amazon?
Can we reasonably think that tomorrow, Amazon, or another similar structure, will buy ships that it will operate for itself and for others (carriers, loaders or large 3 PL / 4 PL groups)? In this scenario, integration is driven by end-user demand, according to a B2C-based model, in contrast to a supply-driven "traditional" integration model (such as the convergence of CMA CGM with Ceva or DSV with Panalpina).
This demand-driven integration scenario implies large-scale investment in technology. However, borrowing costs have never been lower and the supply of ships is plethoric, especially in the 10,000 TEU segment. It could be very enticing for certain internet giants to see their brand name in large letters on the side of a ship, especially if this could be seen as being part of their sustainable development policy.
So, I think it is highly likely that some of the big players in the sector will take the plunge over the next decade. At the risk of seeming a little provocative, I would say that they are almost at the point of being able to afford themselves this luxury without putting at risk the financial equilibrium of the rest of their activities.
4/ What benefits can the sector expect from digital transformation?
One thing is certain: the containerized shipping sector will not return to the 100% paper era. Compared to air freight, this industry has been rather slow in adopting high-performance IT systems, and much still remains to be done to reach acceptable standards. There is almost a 20-year lag between the two industries, but the gap is closing quickly thanks to numerous IT developments and the deployment of new commercial practices (generalization of dematerialized Sea Waybill).
Next steps: Artificial intelligence (which is also related to GAFA ambitions in this industry) and APIs. The enthusiasm we are currently seeing for these programming interfaces is not completely without risk, especially in the light of economic wars and data leaks. Some recent acts of piracy carried out on some big names in the maritime sector have shown the weaknesses of a purely digital world, if it is not accompanied by investment in solid safety nets.
We have now discovered that the cloud can induce this kind of risk and that it is therefore imperative to protect oneself, with all that this means in terms of hidden costs. Savings must be made in the "real" economy ... to finance the virtual economy! The maritime sector does not escape this reasoning, except that the operating margins attained in this elderly industry of physical transportation are not always large enough to generate sufficient funding.
5/ What will be the impacts of the "greening" of the maritime industry?
Sustainable development in the shipping industry really began to be taken into account a decade ago, when operators started to realise that public opinion on this matter could easily accuse them of failing in this area.
For the near future, ship engines will have to continue using fossil fuel. The most optimistic experts talk about a 40-year transition period ... The key question is therefore how to minimize carbon and sulphur emissions. Even the most reluctant shippers now admit that efforts must be made. The IMO 2020 regulation, which will come into effect on January 1st, is a key stage, even if the US does not readily support this approach.
This battle must not distract us from another front: the fight against carbon emissions. "Cleaner" fuels, as well as the use of liquefied natural gas (LNG) or liquefied petroleum gas (LPG) propulsion methods, are making significant progress. But for the next ten years to come, the development of hybrid systems appears to be the most feasible solution for achieving increasingly stringent emission targets.
The Renault group's initiative to reintroduce the use of sailing cargo ships, in partnership with the start-up Neoline, seems to me to be an interesting development to follow, even if it is still an isolated case and by nature involves risks in terms of delays in transit and stopover time.
6/ Towards the end of cheap shipping?
For three decades, container shipping has been relatively cheap and very flexible. Are these days gone now? In the immediate future, no. The capacity currently available and that which is set to enter the market by 2021 clearly exceed the needs. It is therefore very likely that supply remains above demand over the next 5 years.
However, we can consider a more balanced scenario for the period 2024-2029. The gap between supply and demand should gradually be bridged, in a context where the shipping companies that have survived should logically be committed to no longer offering their services below cost.
Among the Top 10 containerized shipping operators, all handle their operations in more or less the same way, with the same rules, the same banks, the same vessels, the same handlers, and similar IT tools. Therefore, it makes sense that they all take the same kind of decisions at about the same time. The more this industry consolidates, the more the differences between the major players diminish. This could lead to a lower level of volatility in a more mature market, unless newcomers arrive in the sector with the ambition of quickly obtaining a share of the market.
7 / What does the future hold for local operators?
Will the small and medium operators disappear, merge or continue to grow in their corner? I would be ready to make the bet that this market segment will develop over the next decade, as major alliances are not flexible enough to respond appropriately to specific regional needs.
These operators will not need to invest heavily in IT systems. They will be in a position to negotiate long-term outsourcing contracts with the major operators, by focusing on the quality of service provided. By offering more than just "box transportation", they will generate acceptable profit margins.
We can imagine the development of these kind of operators in the Mediterranean, the Indian Ocean, the Americas or the islands in the Pacific and the Caribbean. They will be able to commit to a long-term relationship with industrial customers (in the automobile sector, for example) by deploying designated means, which the big players are no longer able to do. Among these operators some names come to mind: Arkas, Matson, Grimaldi, Nile Dutch are now situated in geographical niches that others do not cover. They have developed an effective strategy, in terms of quality of service and response to market expectations, with teams of a manageable size.
Conclusion
This final forward-thinking article announces the end of the summer period. We will be returning to looking at topics more closely related to current affairs. We hope that you have enjoyed this experience of "free thought" on the future of containerized maritime transport, based on an approach that was sometimes closer to that of the novelist than the journalist ...
However, please do not hesitate to share your thoughts and reactions with us generated by the different hypotheses voiced in this series of articles. As always, we will be delighted to continue the discussion with you.
Captain Upply
