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The Race for Profitability in Container Shipping

Michael Ippolito

Michael Ippolito

Optimistic about the intersection of blockchain and finance. My background is in management consulting, where I focused on cost and capital efficiency related engagements as well as M&A advisory work.
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While the $500B global container shipping industry remains the backbone of global trade, it continues to struggle from the effects of the financial crisis over ten years ago.

In the years leading up to the crash of 2008, freight giants such as Maersk and Cosco were locked in an arms race for capacity, building larger and larger ships to accommodate swelling global trade. When global trade not only slowed but fell a whopping 9% in 2009, carriers were left holding the bill for capacity that no one needed While the container shipping market reported a collective operating loss of $3.5B in 2016, the tribulations the industry has faced over the past decade are giving way to an improved outlook in 2020.

Innovation driven by technological breakthroughs such as blockchain offer opportunities for deep cost cutting and increased efficiency, while the effect of recent industry consolidation has improved pricing power for large carriers. Companies that have based their supply strategy on historically low freight rates to make outsourced production viable may have to rethink their footprint in the coming years as carriers find themselves

Tumultuous Waters:

Since global trade came to a virtual standstill from the effects of the 2009 financial crisis, the shipping container industry has been unable to match supply with demand, with shipping capacity growing faster than trade nearly each year. According to the WTO, full recovery of global trade has not been achieved yet. The 6% average growth from 1990-2008 has now been replaced with a meager 3%. The double-edged sword of poor growth and oversupply paved the way for a major down turn for shipping companies, which count on high utilization of ships to break-even. To make matters even worse, shipping container operators had been pouring money into the development of mega-ships, such as the  CMA CGM Benjamin Franklin, a 396 meter long and 54 meter wide container ship that is longer than the Empire State building is tall. These mega ships have only yielded to greater oversupply, making profitability an even bigger challenge.

As a result, massive consolidation and even complete company failure ensued- climaxing with the bankruptcy of South Korea’s Hanjin Shipping Co in 2016. Hanjin was the world’s seventh largest shipping company and its collapse rocked the once impenetrable industry. Members of the industry, including the CEO of Seaspan considered fall of Hanjin to be their “Lehman moment”, referring to the tumultuous fall of Lehman Brothers in 2008. Since then, of the twenty major global players two years ago, eight have either been acquired or gone bankrupt- a trend that could very well continue.

Improvement In 2020?

Race For Profitability:

To conclude, as companies start to reach consistent profitable waters for the first time, innovation in the shipping industry is also taking off. While many industry-wide developments have begun to manifest, three consensus trends for 2020 and beyond in the container shipping industry are the following:

Automation: Automation in the container shipping industry is one trend that could have the largest impact on profitability and its realization could be within the next year.

Alternative Fuels: Although this industry has seen very little adoption so far, the de-carbonization of ships is underway with the rise of parallel innovations such as electric cargo ships, which China introduced last year. Other potential alternative fuels being considered are batteries, hydrogen, biofuels and renewables.

Blockchain: One of the most exciting industry agnostic trends is the rise of blockchain technology in supply chain. Two pioneers in their respective spaces, IBM and Maersk announced a partnership back in 2018 to digitalize global trade through the creation of a global trade platform using blockchain. Their goal is now to drastically improve cost of transportation, reduce inefficiencies with current “paper-based” processes and create for transparent trade.

Michael Ippolito

Michael Ippolito

Optimistic about the intersection of blockchain and finance. My background is in management consulting, where I focused on cost and capital efficiency related engagements as well as M&A advisory work.
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