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What Continued Overcapacity for Ocean Shipping Means to Transportation Logistics Services

Categories: BCO/Shipper.

As 2016 comes to an end, overcapacity still plagues the ocean shipping industry and experts say that trend is likely to continue and even expand.

Recent numbers from the Boston Consulting Group Inc. don’t paint a rosy picture for ocean shippers. In the past, demand for container shipping has grown about 5 percent each year, but now is expected to only grow from 2.2 percent to 3.8 percent annually through 2020. Without much increase in demand, overcapacity is a growing concern for container shippers. Currently there’s around a 7 percent gap between supply and demand for container space, but experts predict that gap could widen to anywhere from 8.2 percent to 13.8 percent by 2020.

“In spite of this, shipping lines are still continuing to invest in new capacity, in larger vessels because this is the name of the game to keep costs down,” Camille Egloff, a Boston Consulting Group Inc. Director told the Wall Street Journal.

If the trends continue, the shipping industry will see some big changes over the next few years, which also means changes in shipping logistics.

Fewer Options

Looking for ways to save on overhead and other costs, many shipping companies have been opting for mergers.

Earlier this fall Nippon Yusen KK, Mitsui O.S.K. Lines Ltd. and Kawasaki Kisen Kaisha Ltd., Japan’s three largest ocean shipping companies, announced plans to merge. Once complete, the new company will be the sixth largest in the world. Meanwhile, China Ocean Shipping Company and China Shipping Group Company merged last summer and sought approval to operate internationally. The union of China Ocean Shipping Company and China Shipping Group Company created a new entity that controls 22 percent of the market share of cargo moving between Europe and Asia.

For those in the logistics service side of the industry, mergers can create a few hurdles. Longtime partnerships along the supply line could be disrupted and new relationships will have to be built. And, with fewer options, there is always a pricing risk due to a lack of competition.

Ripple Effect

Overcapacity in ocean shipping has some wide reaching effects, especially in the rest of the shipping industry.

At first glance, it might seem that air cargo shippers would benefit from its rival’s struggles, but the opposite has been true. Overcapacity in ocean shipping has also caused issues in air freight, which have lead to some carriers cutting back or even closing. Ocean freight rates have fallen by as much as 75 percent on some routes since 2012, prompting some companies to opt for the slower, but cheaper, options of ocean transport. That, in turn, has created an overcapacity issue for some air carriers and some, unable to keep up with the discounts customers demanded, have closed.

With less cargo coming in and a drop-off in production, shipyards are cutting back on employees. South Korea’s Hyundai Heavy Industries lost 2,600 workers in the third quarter of 2016 as demand for more shipping capacity dropped off.