volatility of container ocean freight. 1. the basic economics. 2. implications for the industry 3....

Volatility of container ocean freight

Volatility of container ocean freight

Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$0

$500

$1,000

$1,500

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$2,500

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$3,500

$4,000

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20'dv40'dv

1. The basic economics. 2. Implications for the industry 3. Predicting Demand 4. Controlling Supply 5. Options for Carriers 6. Implications for importers 7. Future Tendencies?

1. THE BASIC ECONOMICS

Elasticity of DemandA measure of how much demand changes when the price of a product goes upor down.

Elasticity of Demand

Determinants:1. The availability of alternatives

Rail. Airfreight Bulk.

2. Time

This allows for very rapid rate increases when space is tight.

Conclusion : Very Inelastic


Elasticity of SupplyA measure of how much supply changes when the price of a product goes upor down.


Determinants:

1. Ease & cost of substitution.

2. Spare Capacity

3 Time needed to adjust supply

Elasticity of Supply

Conclusion: Very Inelastic Sector


This leads to fast falling rates when there is capacity surplus

2. IMPLICATIONS FOR OUR INDUSTRY

D’D S

Price

Quantity Quantity

PriceS’SD

Inelastic Demand combined with Inelastic Supply

A perfect recipe for VOLATILITY

Demand Shock


D’DSPrice

Quantity

Tight space situation (full capacity): - Inelastic Demand (lack of alternatives) - Inelastic Supply (time needed to adjust)

Fast Increasing rates

Supply Shock


S’SDPrice

Quantity

Open space situation (surplus capacity): - Inelastic Demand (if prices go down, volumes do NOT go up) - Inelastic Supply (inability to adjust capacity quickly)

Fast Decreasing rates

Apr

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

20'dv40'dv


All we need to do is match supply with demand

1998-2008

- Globalization of the economy- Elimination of trade barriers (WTO)- Delocalization of production to Asia- Economic growth.

2009-2011

- Economic crisis that nobody saw coming - Second economic crisis in Europe

3. PREDICTING DEMAND

3. PREDICTING DEMAND2012- 2018

- Will there be further delocalization of production? - Shall production shift back to Europe? - Shall production in Asia shift away from China? - What will be the economic growth in Europe?

Conclusion

Forecasting demand is very, very difficult

Solution?

We need to adjust supply

19801982

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20042006

20082010

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20000

40000

60000

80000

100000

120000

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180000

200000

Container ships capacity in DWT (x1000)

4. CONTROLLING SUPPLY(Long term)

Source: Unctad.

- No consultation between carriers - Time lag between order & delivery - Minimum 8 or 9 ships per order - Increasing size of the vessels - Large number of carriers - High investment required- Decreased flexibility in deployment - Reduced life cycle of ships - Decreased flexibility to cascade- Pressure to maintain slot cost competitive

Very Inelastic: Once a decision on investment is made it is final


- Huge investment decision based on inaccurate or unreliable predictions- f.e. Lots of vessels ordered in 2006-2007

- Control of supply proved too difficult when we had the conference.

- Control of supply proved too difficult when we didn’t have an economic crisis.

Conclusion: It should not come as a surprise that we can’t control it right now or in the near future


Bunker / Port Charge Vessel Charter / Admin

FreightProfit

Freight

Freight

Saving by idling

Loss

Loss

4. CONTROLLING SUPPLY(Short term)

As periods of structural overcapacity seem inevitable , the only option left to carriers is to control capacity on short term, through lay-up and slow-steaming.

However the idea that carriers can manipulate supply is an illusion.

Bunker / Port Charge Vessel Charter / Admin

FreightProfit

Freight

Freight

Saving by idling

Loss

Loss


Both break even point and lay-up point can vary from one carrier to the next.

Break – Even Point Lay – Up Point

Both break even point and lay-up point can vary from one carrier to the next.

- Vessel Size- L/F Eastbound- L/F Westbound- Charter cost /vessel cost- Sailing speed- Bunker consumption- Cargo Mix

- Network cost


All we needed to do was to match supply with demand

Conclusion: Predicting Demand is very difficult Controlling Supply is very difficult

Other solutions?Improve CompetitivenessReduce Elasticity between carriersIncreasing Cost, Time & Perception of risk to switch

1. Improve competitiveness.

- Slot cost ~ vessel size

- Improve load factor

- Scope of services. - Cost saving

- EDI/system improvements

- Customer mix

5. OPTIONS FOR CARRIERS

2. Reduce elasticity between individual carriers.

What is the situation today? - No interaction between carriers whatsoever

- Large number of carriers- An even larger amount of NVOCC

- No carrier with a dominant market position



3. Increasing Cost, Time and Perception of risk

A. Cost - Cost of switching is very low- Carriers will (have to) try to increase this cost

(offering Value Added Services, Inland Transportation, Inland Depots, Logistics, E-commerce, Track & Trace)

B. Time- The time to switch is very low- Increasing amount of long term contracts with volume commitments - Reality today:

Validity becomes shorter and commitments looser


3. Increasing Cost, Time and Perception of risk

C. Perception of risk - The perception of risk the risk of switching is very low- Increase brand differentiation

(Advertizing, Calling Ports, Customer Service, Daily Cut off, Schedule Reliability)

- Importers are succeptable to high fluctuations=> Difficult to plan ahead=> Complicates the sourcing model=> Creates tension

- Fixed contract the market goes down - Floating contract the market goes up

- The buy rate impacts their competitiveness (shelf price) - Space availability problems can arrise during peak times

6. IMPLICATIONS FOR IMPORTERS

Conclusion:

Importers benefit from rate stabilityCarriers benefit from rate stabilityNVO’s claim to benefit from rate stability

As all involved parties seem to want the same thing

=> How come we can never achieve it?

6. IMPLICATIONS FOR IMPORTERS

- Long term contracts with rate adjustments (Trigger, Cap, Index, Baf)

- Derivatives (Added security, but risk of speculation)

- Further branding initiatives by carriers.

- Due the low profitability of the container business => Only the strong may survive.

7. POSSIBLE FUTURE TENDENCIES

- Slot cost competition If the market continues to grow at + 10% then bigger is better But

- if growth slows or stops Will that still be the case? - if sourcing origins spread Will that still be the case? - if the price of oil goes down Will that still be the case? - if the Panama Canal expansion is done Will that still be the case?

7. POSSIBLE FUTURE TENDENCIES

volatility of container ocean freight. 1. the basic economics. 2. implications for the industry 3....

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