NS3040 Fall Term 2017 Crisis in Global Shipping

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NS3040 Fall Term 2017 Crisis in Global Shipping Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Introduction Mark Levinson, Abandon Ship: Crisis and Consolidation in Global Shipping, Foreign Affairs, October 5, 2016 Just as excess capacity in the airline industry led to mergers or bankruptcies, a similar process is taking place in container shipping Excess capacity and slow-growing demand Forcing down price, and Bringing on mergers, bankruptcies and joint ventures Although industry likely to remain troubled in short term, in long term will lead to less competition among survivors and higher prices to move products by sea.

Containerization I Modern container shipping started in 1956 Transatlantic service began 1966 after the International Organization for Standardization agreed to standardize sizes and lifting mechanisms so any crane in any port could handle any containers By early 1970s ships with nothing but containers sailing all the major trade routs Made the modern global supply chains possible Since early days a boom and bust industry Before containers most ships small inexpensive vessels left over from WWII If business bad, owners docked ships until conditions improved removing excess capacity

Containerization II New container ships and onshore infrastructure expensive to build and finance Even in weak market owners kept vessels sailing to generate revenues to service debt In periods when international trade grew rapidly, freight rates increased Shipping companies ordered larger and more expensive vessels Often took three or four years to come on line Often economic conditions not as buoyant and surplus capacity and falling rates drove over-extended carriers to ruin.

Containerization III Boom and bust repeating itself today in wake of 2008-09 recession Owners assumed recession would be temporary and that trade growth would quickly resume Ordered new generation of vessels, far larger than those before Flood of cargo never came Average cost of shipping container fallen by half since start of 2015 Port authorities also in financial difficulties recovering their modernizations, dredging, extra facilities If charge more for use of their ports shipping lines may take business elsewhere Oakland California in trouble, along with Tokyo, Singapore, Hamburg and Hong Kong.

Containerization IV With slow growth in trade excess capacity remains Companies beginning mergers or alliances Enable members to collaborate in trimming capacity in certain routes in hopes of propping up prices Now four shipping alliances jointly control close to 90 per cent of the trade that moves container ships Problems Members often have long-term commitments for loading and storage at different locations Sharing a vessel means ships have to make multiple calls within a single port Long distance supply chains have become less reliable because of more frequent delays in transit due to inefficiencies and tie- ups at ports

Containerization V Companies that rely on cargo shipping – manufactures and retail stores will need larger inventories to reduce risk Long-run problems While scrappage of older ships is at record high, mainly older smaller vessels whose removal won’t make much difference to capacity In a few years mergers and alliances have caused a drastic reduction in number of new ships on order With few new vessels on the way supply and demand for container traffic will come back to balance Freight rates will raise and a few dominant companies that survive will be able to dictate terms Similar story to that in the airline industry.