Editor’s Note: As he has done in past years at this time, Dan Smith, Principal, The Tioga Group, shares his views on the current ocean cargo arena.
Logistics Management: Will the current ocean carrier alliance structures finally make carriers more solvent and more reliable?
Dan Smith: No. Solvency will only come when demand starts catching up to capacity. Instead carriers continue to expand capacity faster than trade is expanding with new megaship orders. From what I can see alliances have made service less reliable by complicating vessel loading and planning, and by adding stops to fill large vessels. Vessels are also straining terminal capacity, making it more difficult for MTOs to turn vessels on tight schedules or get late vessels back on time.
I would characterize alliances as a survival strategy, not an improvement strategy. If they lead to faster vessel retirement and capacity “rationalization” they could help with solvency, but they have not done much so far.
LM: Are shippers seeing more transparency in pricing and service as a consequence of enhanced information technology?
Smith: Possibly, on the margin. But what counts is what information carriers choose to make available, not the technology used.
LM: Should we expect international trade tensions to have an impact on vessel deployments and schedules?
Smith: I understand that there have been “extra loaders” introduced into eastbound TP schedules to handle the short-term surge from “front loading” import inventory. The vessel capacity will be controlled by the headhaul, so it will stay high as long as Asian exports/US imports stay high. That surge seems to be declining. But where else would the capacity go?
The big problem is that the rampant uncertainty over trade makes it impossible for anyone in any part of the business to make coherent plans.
LM: Can you share any insights on the status of IMO 2020 preparations and the freight rate implications shippers may expect to see?
Smith: I think IMO 2020 is being overshadowed by the trade wars. Rates will go up, not only because carriers costs will go up but because carriers need every possible reason to raise rates. The big argument will be how much they will go up and under what terms. (See transparency issue above)
LM: The Panama Canal Authority has proposed to make “toll modifications” designed to retain and “incentivize” increased cargo volumes. Specifically, the proposal offers more attractive rates for shippers who benefit from the Panama Canal Loyalty Program by adding new levels with reduced rates in the capacity charge for shipping lines deploying between 2 million to 3 million TEUs, and additional reductions for lines deploying an incremental over 3 million TEUs. The incentive implemented in the last toll modification of fiscal year 2018 for total TEU loaded in the return voyage (TTLR) will remain in effect. What are your thoughts on this?
Smith: Regardless of how they structure it, it’s an incentive and a volume discount. Incentives and discounts will nudge the needle farther toward Panama from Suez or U.S. West Coast options. Suez could cut rates in response, but I don’t know of any way to cut rates on the Pacific Ocean.
LM: Any other trends we may expect as we inch closer to 2020?
Smith: Terminal automation is going to proceed slowly, although there may be some splashy exceptions. Automation of any type requires capital and confidence in near-term payback, and the current environment doesn’t provide that confidence.
The hype about blockchain will cool down when people realize that it is only a processing-intensive data management technique, and will not actually make any new information available or make information available any sooner. All the technology and technique in the world is useless unless they parties with the information s choose to share it.
Politics will continue to be painful, unpredictable, and disruptive.