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Addressing industry challenges through collaboration

Both capital expenditure and operating expense figures would concern any investor in the shipping industry. Massive investment in assets, port expenses, high stevedoring costs, extraordinary bunker fuel costs (definitively not recovered by the bunker adjustment factor (BAF)), vessel damage cost not recovered from terminals, and evermore security and environmental regulations all collate to keep moving costs upwards.

The shipping lines’ actual return on investment in the modern day scenario has become a sort of lottery in which financial forecasts and risk assessment is better coming from some kind of fortune teller than from the most brilliant market analyst. Rates are unpredictable and more volatile than in the past. Over capacity in the market is a disease without a cure. Despite the efforts for consolidating industry capacity, the antidote is not yet available.

Things get further complicated when countries protect their own strategic interest by financially sustaining unprofitable national carriers, thereby keeping capacity artificially high. Meanwhile, the carriers’ shippers continue fishing for lower rates in these troubled waters, taking advantage of the imbalance between supply and demand while the industry looks for economies of scale, whilst terminals focus on their own operations as they watch this bad industry movie play out.

What can the carriers do in this challenging scenario? They have little room to reduce their fixed costs and market and operational volatility will not allow them to establish a solid base for financial forecasting. Shipping lines must focus only on what they can control; reducing operational cost and doing their utmost to try and control market capacity. Reducing cost starts with rejecting unjustified costs, revising contracts and agreements and finally evaluating better ways to provide the same service at a lower cost (though not necessarily at the same service level).

Manuel Perez, Director of Product Management, Xvela, San Francisco Bay Area, USA
Edition: Mega Ship Ready

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