Ready for the next wave of disruption?

The ocean shipping ecosystem saw a period of disruption last year as demand skyrocketed in reaction to nationalistic trade policies and new tariffs. In an effort to avoid looming tariffs, shippers sought to pre-build up their import inventories. This increase in demand led to ocean-shipping capacity constraints and higher rates for shippers that lasted through the first quarter of 2019.

Ocean shipping has spent the first half of 2019 recovering from these disruptions, with container rates returning in the past few months to where they began at the start of 2018. But new potential disruptions are on the horizon as ocean carriers prepare to respond to new fuel requirements designed to reduce emissions and launch significant digital transformation efforts.

Article Figures

[Figure 1] Drewry World Container Index Enlarge this image

Rates steadying?

According to the Drewry World Container Index (see Figure 1), rates peaked at a level of $1,800per forty-foot equivalent (FFE) in the fourth quarter of 2018 before dropping steeply.¹ From March to July of 2019, rates have been trading between $1,300 and $1,400, marking a relatively "long" period of rate stability compared with the volatility experienced the past few years. In other markets, dry bulk rates echoed that pattern, with the Baltic Exchange Index recently declining in the first quarter of 2019 from elevated 2018 rates.²

While rates and demand appear to be steadying, shippers and carriers alike will face new challenges and costs as they strive to meet the International Maritime Organization's low-sulfur requirements over the next year. (These requirements will reduce sulfur oxide pollution by an estimated 77%.)

For example, dry bulk shipping has seen some temporary capacity shortfalls as carriers have taken ships out of service to make mandatory upgrades to meet these environmental regulations. This reduction in capacity has driven dry bulk rates in the second quarter to their highest points in the past five years. Additionally, in advance of the changes, many carriers have increased their BAF (bunker adjustment factor), or fuel surcharges, in anticipation of higher fuel costs. Inconsistencies among the BAF programs has introduced abit of uncertainty into pricing expectations.³ However, it appears that the implementation of the refining capacity needed to support the new sulfur mandates is moving ahead with limited risk of disruption.⁴

The coming digital transformation

With mergers seemingly out of the way for the immediate future and brinksmanship on tariffs the new norm, the greatest source of near-term disruption comes from digital innovations occurring across a wide swath of the ocean ecosystem. Everything from paperwork to rate benchmarking to end-to-end forwarding is ripe for digital disruption. It's clear that digital technologies have the potential to immediately change the way forward-thinking shippers have been doing business for centuries.

For example, digital startups, like Flexport in the freight forwarding arena, are attracting significant attention from both shippers and investors.⁵ Flexport promises its clients a "digital-native" infrastructure that will eliminate paper, automate manual processes, and provide advanced analytics to consolidate customer shipments and generate customer insights. The company has grown to $441 million in revenue in a few years. As a result, in February, investors pumped $1 billion into the company, and it is currently valued at $3.2 billion.

Other startups go beyond forwarding to include ocean-ratevisibility (Xeneta) and digital marketplaces (such as Shippabo, CoLoadX, and Kontainers). Innovation is not limited to the container world, either. Startups, like London, U.K.-based Fractal Logistics, are applying analytics and data science to dry bulk shipping.⁶

Flexport and Fractal support their digital operations with hard assets like ships, aircraft, and warehouses. In turn, some traditional asset-based players like Maersk are also keen to be at the forefront of this wave of digital invention (while others are more skeptical of immediate change). For instance, Maersk is developing several key offerings internally. The ocean-shipping provider has launched a digital forwarding platform called Twill. Additionally, Maersk is a leader in driving the adoption of blockchain standards and has developed blockchain-based solutions like TradeLens. On top of homegrown solutions, Maersk is incubating external startups through programs like OceanPro in India. Through this program, Maersk is supporting the growth of local startups with the ultimate objective of leveraging developments in its own digital ecosystem.

On top of digital transformation, Maersk is also changing the nature of ocean contracting.⁷ Its digital solution Maersk Spot is creating guaranteed bookings for specific ships. For shippers with predictable supply chains, this innovation offers reduced lead time variability, which would translate into significant reductions in inventories for shippers.

For shippers, all these innovations are generally good news. These digital solutions are driving new service offerings, more efficient operations, and tailored offerings for underserved corners of the market. For instance, there has probably never been a better time for smaller manufacturers to leverage rate transparency and cargo consolidation to minimize their disparities of scale versus larger manufacturers. Larger shippers, for their part, are developing new capabilities (and in many cases, investment funds) to select and foster startups to meet their unique needs and create competitive advantage.

All shippers need to keep in mind that there will be winners and losers in this transformation, and they need to carefully consider potential impacts to their networks should any of their current partners struggle as a result of these changes.

Notes:

1. Drewry Shipping Consultants, World Container Index, https://www.drewry.co.uk/supply-chain-advisors/supply-chain-expertise/world-container-index-assessed-by-drewry

2. BDI Baltic Exchange Dry Index, https://www.bloomberg.com/quote/BDIY:IND

3. Greg Knowler, "Low-sulfur BAFs offer shippers path to hedge exposure," Journal of Commerce (May 1, 2019), https://www.joc.com/maritime-news/container-lines/low-sulfur-bafs-opportunity-shippers_20190501.html

4. Bill Mongelluzzo, "Enough low sulfur fuel at U.S. ports come 2020?" Journal of Commerce (Feb. 19, 2020), https://www.joc.com/maritime-news/container-lines/enough-low-sulfur-fuel-us-ports-come-2020_20190219.html

5. Alex Konrad, "Freight startup hits $3.2 billion valuation after $1 billion investment led by SoftBank," Forbes (Feb. 21, 2019), https://www.forbes.com/sites/alexkonrad/2019/02/21/flexport-raises-1-billion-softbank/#e865a0b56507

6. Sam Chambers, "Maersk Spot unveiled as Danish carrier moves ahead with online box bookings," Splash (June 25, 2019), https://splash247.com/maersk-spot-unveiled-as-danish-carrier-moves-ahead-with-online-box-bookings/

7. Ibid