How the Shipping Industry is Cutting Costs in Face of Potential Slowdown

The global shipping industry is entering into what could be a significant slowdown–and many logistics providers are responding by circling the wagons. Spurred on by the economic and manufacturing slowdown in China and the overall failure of emerging markets to live up to projected growth expectancies, many container shipping lines are turning their attentions toward cutting costs and reducing capacity.

Dropping Staff and Planned Vessels

The slowdown the industry is facing could be the worst since the global economic crisis of 2008-09. Danish shipping line Maersk (the world’s largest) recently announced plans to lay off 4,000 of its 23,000 shore-based staff. It also canceled plans to purchase six Triple-E vessels, the world’s largest container ships, and pushed back plans to buy eight smaller vessels.

“Given weaker-than-expected demand, this will be enough for us to grow in line with our ambitions over the next three years or so,” says Maersk Line Chief Executive Søren Skou, speaking to the Wall Street Journal.

Freight Rates Falling Sharply

Even with the expansion of global logistics related to the rise in eCommerce, dwindling orders from developing economies and overcapacity have made an impact on freight rates. Monthly average spot freight rates between Shanghai and Northern Europe have dropped dramatically over the course of 2015: falling from over $1,000 per 20-foot container at the beginning of the year to just $428 as of October 15th.

“It’s as bad as it’s been since the financial crash,” says Jonathan Roach, container market analyst for Braemar. “This week I saw an 8,500-TEU container ship being chartered at an all-time low and a 4,250-TEU Panamax ship going for $6,300 a day, the lowest rate since 2009.”

Growing Their Way Out of Trouble

In response to the slowdown, many companies are taking a different tactic in efforts to mitigate against losses: deals, mergers and consolidations are expected to help some shipping lines stay afloat.

“I expect to see a number of deals,” says Skou, whose own company is in talks with Singapore-based Neptune Orient Lines about a potential takeover to the tune of $1.9 billion.

Additionally, China Ocean Shipping Group Company (COSCO) and China Shipping Group are expected to merge to create the world’s fourth-biggest shipping line, after Mediterranean Shipping Company (MSC).

More Economical Shipping

Among the main solutions put forth to try and mitigate potential losses, is increased shipping and supply chain efficiency. Larger vessels, while too expensive to be utilized by some smaller S&L organizations, can carry close to 20,000 TEU–making them ideal for companies looking to form alliances in order to consolidate shipments and save fuel.

“Some lines are already working in alliances, but larger businesses would have the capacity to get rid of older ships, and pull together the big and efficient vessels, which offers economies of scale,” says Roach.

Even with low oil prices, a ship carrying 20,000 containers consumes less fuel and costs less to transport each TEU than one carrying 5,000. It may also lead to faster shipping times, less time spent in inspection or drayage, and even less environmental impact.

As shipping companies consolidate and cut costs, the fact remains that consumers’ need for transported goods remains higher than ever. Even as the global shipping industry prepares for harder times ahead, shipping and logistics will remain a robust and vital part of economic growth.

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