Tag Archives: Lo-Lo

When good prices go bad

clownHow little is too little to pay for freight? It’s a question that has been exercising the minds of operators in the Multi-Purpose (MPP) vessel market as the financial health and stability of one player after another has been called into question.

In such market conditions the risk of schadenfreude or attempts to gain further market share must be resisted. This is a structural crisis that threatens to impact all players in the Ro-Ro and Break-Bulk sectors to some extent.

When it is your customers which have reportedly threatened to blacklist shipping companies offering freight at unrealistically low levels, alarm bells should be sounding. When OEMS perceive a risk to their cargo from the carrier entering bankruptcy mid-voyage, the signal that is being sent is clear: we are already at the point where freight is too cheap.

A period of cut-throat competition has left the MPP market close to implosion and we are likely to see a clearing out of operators that cannot continue to burn cash trading their assets at below break-even levels.

Typically of course the removal of an operator, whether through closure or merger does not result in removal of capacity. This suggests another, more fundamental question that needs to be addressed: will there be a point in the coming year when rates stop declining, start to stabilise and even begin to increase?

From the actions of shippers it seems clear that – despite satirical suggestions to the contrary – they do not want their freight for free. All-in delivery might be a good incentive at the point of consumption but the role of the logistics provider is not something that the shipper expects should be delivered at zero cost.

The challenge for the carriers seeking a better rate has been to deliver competitive differentiation in markets where there is a high degree of commoditisation. This is true for the automotive industry and parts of high and heavy cargo groups. It is less true in break-bulk but this has not been enough to prevent gouging of rates to unsustainably low levels.

So which tools can be used? Consolidation looks likely to continue in the container market – though this will reach natural limits defined by capacity and by regulatory constraints. The Lo-Lo sector is the more fragmented and therefore open to some consolidation, an opportunity that exists to a far lesser extent in the Ro-Ro sector.

This suggests that it will be harder for operators in the specialist sectors to achieve lasting rate increases. Scrapping is already having an effect on capacity so perhaps the long term solution does not lie in a ‘self-correcting’ market model where supply and demand will re-balance over time.

Where these specialist shipping sectors go in the longer term is a function of deeper changes that lie inside the companies themselves and in their relation to the customers they serve.

To survive the current crisis and to adapt themselves for the future, operators in these shipping sectors need to understand the paradigm shift they will need to make; embracing a model that makes them part of an industrial value chain that connects producer to end user.

There are already sectors where the shipping element is a ‘floating pipeline’ and closely integrated to the industrial process, rather than a zero sum game of ‘lowest bid wins’. If they are to come through this current crisis, shipping companies will have to make the determination for themselves whether such a transformation can be made; where they can reduce their costs, adapt their business model make a margin based on added value.

This may sound no less painful than the process of restructuring and protection that many are making or facing at present, but it does at least offer hope for the future, albeit one that shares few of the characteristics of the past.