How Container Ship Oversupply Impacts The Global Supply Chain GlobeCon

How Container Ship Oversupply Impacts The Global Supply Chain

Categories: BCO/Shipper.

Oversupply has been a major worry in the shipping industry since the last major recession, but recent developments threaten to make it an even greater cause for concern. Most significantly, excess capacity associated with the rise of mega-ships has created a global shipping environment in which consolidation has increased.

While many large operators herald these consolidations and shipping alliances as creating better economies of scale, they also have the effect of pushing out smaller rivals, preventing new challengers, and ultimately stifling competition. The result may be larger ships making fewer trips and serving fewer ports, reducing flexibility and responsiveness to shipper needs. Many analysts are worried about the overall health of the shipping industry as a result of these changes. In order to stay competitive in this challenging environment, logistics leaders must understand how these changes will impact their business and adapt accordingly.

Larger Ships But No Goods to Fill Them

As with many changes, the starting point for the issue of overcapacity was technology. The ability to produce and effectively manage increasingly large container ships (often referred to as mega-ships) has led to a large-scale shift toward these types of vessels. The largest shipping lines ordered these mega-ships to help minimize costs and increase efficiency, but this process aggravates the oversupply problem. They have the resources to invest in and effectively operate these larger vessels, even if they run below capacity. While this shift has been a boon to the biggest players, it’s helped destabilize the container industry as a whole.

For the past decade, shipping capacity has grown faster than global trade. This sluggish growth in shipping, combined with oversupply of capacity, has laid the foundation for consolidation. At the same time, the use of mega-ships has continued to grow. While efficiency gains and lower costs can be realized from larger ships, this only occurs if these ships are fully utilized. Slow growth in shipping has prevented this from happening, leading to economic woes in the container industry. Some companies cannot keep up, as evidenced by the bankruptcy of Hanjin. The overall effect of this situation is more consolidation and a reduction of competition.

With fewer players in the shipping container business, competitive forces are no longer driving quick responsiveness. This means that oversupply will likely persist for some time. The challenge for the container industry is to continue to innovate while better matching supply with demand. One of the ways to eliminate excess capacity is through shipbreaking. This industry has picked up significantly in recent years with even young cargo ships being scrapped. At the same time, this trend has made it so that mega-ships make up a greater percentage of all container ships. Since these ships are more difficult to unload and fewer ports can serve them, the result has been port congestion, especially on the west coast of the US.

Less Competition in the Container Industry Means Logistics Challenges

Other problems lie just beyond the horizon. According to a Global Shippers Forum report from last year, the excess capacity brought on by mega-ships could yield a reduction of competition in areas such as “sailing frequency, transit times, ports of call and associated service quality.” Although it’s possible that the excessive consolidation could be met by regulatory pushback, it’s more likely that the container industry will become less responsive to competitive pressures.

Shippers will surely benefit from the economies of scale and reduced fuel costs associated with consolidation and mega-ships, but the full costs of shipping consolidation and oversupply will be felt in other parts of the supply chain. Some of these are not readily anticipated, so it’s important to analyze industry trends and plan carefully to ensure your business is prepared to meet any challenges.

Interstate carriers should be ready to pick up the slack by developing more capacity to address the lack of supply in the trucking industry, becoming more efficient at ports, and potentially lowering costs. These operations must work to speed up the movement of goods in order to compensate for the less flexible container shipping schedules and the congestion and delays that result from so many mega-ships using key ports.

While the ground and air-based logistics industry has largely focused on supporting just-in-time delivery through the development of local distribution centers and advanced inventory management technology, oversupply and the shipping container industry’s consolidation threatens this push toward a more nimble and reliable supply chain. Larger vessels means that it will be difficult for any unexpected changes to demand to be addressed quickly. This means it’s more essential than ever to have your port operations at peak efficiency.

To learn more about how Globecon can empower your supply chain, contact us today.