December 31, 2016 could not have come soon enough for shippers that import and export ocean containers through the Trans-Pacific ocean shipping lanes to and from the United States. 2016 will be remembered as one of the most turbulent years on record for the international shipping industry. Shippers struggled to find consistent and reliable services while weaker ocean carriers struggled to survive.
Industry experts had been predicting for several years that the steamship industry was ripe for consolidation. Even the most bullish experts could not have envisioned the amount of mergers and acquisitions that transpired in 2016. There are now only 10 containership companies offering service in the major trade lanes compared to 20 only two years ago. CMA, which started the consolidation frenzy, announced their takeover of APL had been completed. Japan announced a joint container service between MOL, NYK and K-Line. China announced the merger of China Shipping and COSCO. Maersk announced it would be acquiring Hamburg Süd. Hapag-Lloyd announced they would be combing services with United Arab Shipping Company. To top it off, the industry witnessed Hanjin Shipping file for bankruptcy leaving containers seized and stranded across the globe. It will be hard for 2017 to top 2016, but further consolidations and bankruptcies are not out of the question.
The state of the containership industry has created a clear sense of nervousness as shippers enter the 2017-18 contract period. The transformation taking place in the market has been one-sided. The carriers are reaping all the benefits not the shippers. Carriers will argue that the consolidation will allow them to reach more customers, provide more reliable services and improve their bottom line. It is debatable whether these benefits will eventually come to fruition over time. What is not debatable, is that moving into 2017 shippers have fewer carrier choices and less reliable service options than they did at the beginning of 2016.
There is general concern over the long term financial health of the steamship lines. Shippers recognize that having more carrier choices is healthy for the industry and helps balance out supply chain requirements. More importantly, the industry needs to avoid at all costs another major carrier bankruptcy. Shippers witnessed firsthand the chaos that immediately followed the Hanjin bankruptcy. The unthinkable happened once and it could happen again unless all stakeholders can agree to work together for the well-being of the industry.
Will the carriers be successful in increasing contract rates on May 1, 2017? A good indicator will be the change in the spot rate. Contract holders need to observe first-hand that carriers are serious about providing rate stability in the market. If the carriers are unable to maintain the spot rates at or above sustainable levels, it will become a challenge for them to secure the increases they claim are necessary to return to profitability.
Will space be a concern for shippers? Once again, the carriers will be confronted with a market that has more supply than demand. If this holds true, the market will present the carriers with three options. They can focus on increasing market share by offering competitive rates, focus on stability by offering profitable rates or delay the deployment of new vessels into the market in an attempt to minimize the overcapacity situation. In past years where supply exceeded demand, the carriers resorted to securing market share. If this is the path chosen, any increases secured during negotiations will likely evaporate as carriers scramble to fill their ships. Rates are not likely to fall to the historical levels witnessed in 2016, but they could drop to levels that put additional carriers at risk for financial collapse.
Negotiations for the May 1, 2017 – April 30, 2018 ocean contract rates are underway. The next six weeks will determine whether the industry will experience some much needed stability or undergo another turbulent year. Spot rate levels available in the market during mid-March to mid-April will provide the best indicator on which direction the industry is moving.
The International Housewares Shippers Association (IHSA) is a not-for-profit association formed to benefit companies belonging to the International Housewares Association (IHA). Through the combined leverage of members, IHSA negotiates freight contracts and partners with other logistics providers to lower supply chain costs.
IHSA’s main function is to negotiate the lowest possible transportation rates and provide the highest quality service for all participating members. Additionally, IHSA members receive valuable market intelligence and advice through regular newsletters and briefings.
IHA member companies looking to reduce their ocean freight costs or have questions about an ocean freight issue are encouraged to contact IHSA to learn about the program. Contact IHSA at +1-513-489-4743 and learn more on our website.