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

2. 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.

3. 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

4. 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.

5. Containerization III
Boom and bust repeating itself today in wake of 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.

6. 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

7. 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.