Structural Changes in Container Shipping Industry - Essay Example

Shipping Economics (Structural Changes in Container Shipping Industry) Introduction The shipping industry is the heart of international trading business. It is the moving force which turns business plans into action, the trading mechanism that facilitates swift delivery of goods to each doorstep. Goods and services cannot be traded or exchanged with internationally without shippers to carry and transport them to their destinations. The industry is in reality the lifeblood of global commerce. The structural framework within which the shipping industry operates is the liner conference. The UNCTAD Code of Conduct for Liner Conference (UNCTAD, 1975) defines it as an organization of two or more vessel operators agreeing to provide international liner services to carry cargo to specified geographic locations under the condition of common freight rates and several other conditions with respect to liner services. Marx (1953) describes it as " agreements organised by shipping lines to ports of call to arrange the pooling of cargo, freight monies or net earnings. They generally control prices, i.e., freight rates and passenger fares. They create a permanent body with a Chairman or Secretary. The conferences were either informal (oral) or formal (written), containing carefully established rights and obligations of membership." Such an authority to set and fix the price gives them the power of a cartel to monopolise the industry. The shipping industry has evolved from birth and continues to evolve in the wings of technological advances. Globalisation has taken place, and as shared by Notteboom (2004, p.86), it is reshaping the shipping industry. This paper aims to provide information on the extent of structural changes taking place in the container shipping market. The Liner Shipping According to Jansson and Shneerson( 1987, p16), the liner shipping is geared towards providing regular services between ports following time-tables, and prices are advertised well in advance. It resembles a public transport system wherein the service is open to all with some cargo to carry, known as 'general cargo' which are transported in various packaging, such as pallets, boxes, barrels, crates. Providing such service requires extensive logistics, i.e., ships/vessels, loading and unloading equipment and agencies to broker the port operations. The liner is bound to keep its schedules and be stringent in implementing its policies, thus, it has to leave ports on schedule full or half-full in load capacity. The high cost of operating a shipping line is fixed. The salaries of managers, engineers and crew members, the port handling expense, and other administrative and operational expenses are regularly paid regardless of whether the vessel is full to capacity, or there are large or small stocks to carry when sailing. This creates supply and demand imbalance, a market condition which would either push prices upward or pull them downward, as the case may be. In this particular case, there is an excess vessel capacity (supply quantity) with respect to actual load (quantity demanded), a situation which triggers a downward trend of freight rates or conference tariffs. Profits have been low and relatively small in liner shipping. Under a loose market condition, trading losses may even be incurred. The problem is compounded by the inability of carriers to make quick turn-arounds to be able to reduce costs and operate at marginal profits. Sturmey (1975, p125) stresses that the best approach to reduce shipping costs lies in speeding up the turn-around of ships. Liners spend 60% of time in port cargo handling, a complete waste of expensive capital tied up in engines, accommodation and hull". The inefficiency of handling in both loading and discharging ports causes the congestion of ships at the wharf rendering it difficult for them to make another round or more of sailing. Container Shipping Traditionally, freight was loaded either in bulk or as assorted items contained in separate boxes or crates. Today, the growing tendency is to group them together and place them in container vans, knowing there would be many advantages for doing so. Containers can be filled and sealed in the container yard for carriage to ports of shipment, thus reducing breakage of cargo and eliminating pilferage. The use of containers serves to reduce high port handling fees and speed up the turn-around of vessels. In both ports, loading and discharging are made quicker and easier. This is an indication of a significant change emerging in the shipping market with the wholesale adoption of the container. Haralambides (2000) points out that the old pricing scheme, acknowledged to be discriminating, was based on the value of goods and the practice has changed and has become less common as a result of containerisation and the ensuing charging of uniform rates. The current trading practice considers a pricing system based on factors characterised by volume or weight and cargo handling. It was thought out that containerisation would spur economic growth, and when it did in some developed countries, the demand for shipping goods increased to a considerable level. To cope with demand, companies having already a fleet of large ships engaged in technological innovation as they embarked on containerisation for greater competitiveness. The first decade of containerisation has proven profitability in the shipping business. Economies of Scale in Vessel Size Drewry ( 2001) calculated that there is a substantial reduction in cost in larger vessels from smaller capacity units with "potential cost differences of around 50% between a panamax unit of 4000 TEU and a mega post-panamax unit of 10000 TEU'. Cullinane et al (1999) have agreed that "economies of scale for specific routes in the trans-Pacific and Europe routes are enjoyed at ship sizes beyond 8000 TEU, even if one considers different scenarios as regards port productivity." But this finding has certain limitations, and, as Notteboom observed, "the economies of scale did not necessarily translate into reductions in cost per TEU carried." The savings that might be realised does not necessarily mean a reduction in cost because operational costs increase in the light of making a more competitive global market. Furthermore, according to Notteboom (2004), although there is a possibility of deploying huge ships of about more than 9,000 twenty-foot capacity containers (TEU), the current requirement signals a different size trend of only around 5,500-6,500 TEU as these units are expected to be more competitive and flexible to handle at ports of call especially in terms of drafts, space, facilities, etc. In terms of vessel capacity per voyage, large vessels tend to experience oversupply in capacity vis a vis actual utilisation of space for cargo. There is no assurance of getting a constantly high utilisation of vessel slot capacity on bigger vessels. Consequently, freight rates would fall and price competition erodes the profit levels of the liners. The Changing Structure of the Shipping Industry The macroeconomics of shipping is anchored on making the machinery of the industry work progressively without forgetting or ignoring the influences of a broader market and the need to adapt to global innovations. Sturmey (1975, p.168) narrates that "the 19th century typical structure of the world's shipping industry was a one-man/many ships model which evolved from the one-man/one-ship pattern. After the invention of liner services, there was a series of mergers in shipping." The capitalists saw the need for interrelated businesses to grow and expand, and to adopt modern market strategies. The acquisitions and mergers developed into diversification of activities giving way to ownership of other types of ships than passenger and cargo lines. This led to functional groupings indicating that industries have integrated shipping to their line of activities. In container port terminals, the transformation was enormous that even large terminal ports face the risk of losing business partners or clients in the face of ever-growing partnerships, strategic alliances, mergers and acquisitions which have taken hold of the shipping and port markets. The government ruling on transparent and open concessions or public biddings gave impetus to the entry of global market players into the local port industry. Thus, shipping lines have entered the terminal port market and the terminal ports' traditional clients engaged in new alliances and partnerships with shippers. Due to these mergers and consolidations which created an extensive terminal network, the powers-that-be of consolidated ventures chose to expand in the construction of new dedicated terminals which are now widespread across continents. These industrialists have transformed themselves from single location/regional players and made it big into the world market. Sturmey (1975, pp.170-171) continues, "international consortia for containership operations" was created. "Under these consortia, ownership, operation and flag can be completely separated from each other. Because each of a number of shipping companies contribute one or more container ships to a consortium. The ships, while bearing consortium names, are registered and crewed in the country of beneficial ownership but are operated by the consortium which may itself own the containers, handling facilities and inland transport and distribution network." To improve profitability and balance the risks involved in their businesses, and to optimize the utilisation of their assets, leading container port terminals operators with all their splendor and technical competencies in terminal handling went into global investment and invaded the local terminal ports. As Notteboom (2004) contends, in pursuit of organisational growth, they "try to keep a competitive edge by building barriers to prevent competitors from entering their domains .." "These barriers are partly based on the building of strongholds in selected ports around the world and on advanced know-how on the construction and management of container terminals." Notteboom (2004) further writes, having gone into a joint venture with local operators, these global capitalists who have sought to improve the operational efficiency of their trading business, have now the ability to control the local market where they saw an immense potential of handling huge amount of cargo. On the other hand, foreign shipping and terminal port investments will be favorable to the local economy. Foreign investments will also prompt the local government to make an optimistic forecast of a more steady political climate and stable economic outlook. The continuing trend of consolidations adversely affected the local small terminals, with the container-handling market captured mostly by giant global investors who are in partnership with shipping lines owners. Clients gave indications of strong preference to liner-operated terminals, leaving the non-carrier based local operators faced with new market challenges. Alternatively though, the small operator can divert and redirect its business to shortsea market. The market power of the big players cannot be discoursed about, they, having control over a major percentage of the world's total container port capacity backed up by a sound financial standing. Statistics reveal that the worldwide container port throughput, according to Notteboom (2004) "increased from 36 million twenty-foot equivalent units (TEU) in 1980 to 266 million TEU in 2002, and the prediction for 2010 is between 432 and 468 million TEU". These figures are expected to rise further as consolidation moves of companies continue. Relatively, Sturmey (1975, p.168) remarked "the state-owned shipping/fleets now account for significant percentage of world tonnage, especially in socialist nations", as governments geared towards being market-based organisations. The mergers and consolidations are expected to realise economies of scale and optimise logistics utilisation. The liner shippers-terminal operators tandem has developed a total integrated system which integrates and makes part of the system the supply of inland logistics up to the warehouses or distribution called the door-to-door concept in the transport venture. Concluding Remarks The paradigm shift in the shipping industry was an offshoot of globalisation. Changes occurring in the industry are the consequences of the changes taking place in the external world. They have come along to develop a better system out of a refined structure. These reforms are taking place because the conventional type is becoming irrelevant to the current trend and technology advances. The congruency therefore lies in improving the structure and the systems to consequently increase the output, and in ensuring that these improvements were effectively carried out. Structural changes are haunting the shipping industry, and restructuring is expected to continue with the dynamics of time. The shipping lines and port terminals affected by the transformations and those who cannot force their entry into the market due to some restrictions imposed may refocus on workable strategies to attain their goals of revenue maximization and establishing customer value. The shipping industry is characteristically oligopolist. To ensure that its market power is not abused, these oligopolists shipping industrialists must be watched over by some regulating government institutions to ensure that they do not set prices at levels that prevent entry of new interested parties. Alternative solutions to the market and pricing strategies of a traditional cartel which lead to excessive tariff rates and oversupply should be instituted to allow the interplay of market forces and exercise competition. For free entry into the industry and for fair price competition in the industry, the principles in the theory of contestable market should apply to achieve efficiency of service and customer value. As Baumol (1982) had written, "contestability theory .can effectively constrain market power and affect firm behavior, regardless of the number of firms already present. This means that whether the industry is characterized by an oligopoly or even a monopoly, interventionist tactics to bring about competitive behavior may be unnecessary". Reference List Jansson, J.O. and D. Shneerson. 1987, Liner Shipping Economics. London: Chapman and Hall, pp. 135-136. Sturmey, S.G.1975, Shipping Economics. MacMillan, pp.124-125.; 168-169. Notteboom, T.E. 2004, Consolidation and Contestability in the European Container Handling Industry, "Maritime Policy and Management" Marx, D. 1953, International Shipping Cartels. Princeton UP, Greenwood Press Publishers, N.Y. Haralambides, H.E. and Veenstra, A.W. 2000, Modelling Performance in Liner Shipping. Handbook of Transport Modelling. Drewry Shipping Consultants (2001) Post-Panamax Containerships - The Next Generation. London. Baumol, W. 1982, 'Contestable Markets: An Uprising in the Theory of Industry Structure' American Economic Review 72, pp.1-15 Willig, R. 1986, "Contestability Developments Since the Book." Oxford Economic Papers 38, pp.9-36. UNCTAD, 1975, UN Conference of Plenipotentiaries on a Code of Conduct for Liner Conferences. Vol. 2, Final Act, UN, New York. Read More