The year 2016 will go down as a historical one for the ocean shipping business. For years, carriers have been operating in the red because of pervasive, non-compensatory rate levels. Any student of business would tell you something had to give, but after years of rate decline, most carriers were still sailing and even the carriers may have started to believe the old adage, “too big to fail.” Unfortunately, the “chickens came home to roost” in 2016, with a major carrier failing in the midst of peak season, leaving not only supporters of the carrier in the lurch but their alliance partners and basically everyone in the international supply chain, as there are also slot charter agreements outside of the traditional alliances.
To combat non-compensatory rates, carriers have done everything possible to reduce cost, building mega, fuel-efficient vessels to lower slot costs, and joining alliances with other carriers to share in operating costs that weren’t being covered with rates collected. Cosco Shipping got ahead of the curve by combining China’s two largest shipping lines, a daunting task, but one that is paying off for the new company and our customers, with improved scope and service.
Economists studying our industry fear that if some major changes are not made that bring carriers back to profitability, we will see a repeat of this scenario. Let us all come together as an industry and combat these kind of interruptions and work on improving the overall supply chain.
What do we do as an industry to prevent these costly and damaging interruptions to the supply chain? First of all, shippers and carriers should have some serious discussions about how they contract and agree to rates and contract terms that are fair and keep disasters at bay. We cannot let only supply and demand be our guide in offering rates; shippers must demand excellence and innovation from their service providers, and carriers who perform should expect rates that not only cover costs but offer a fair profit to allow the carriers to grow and create services needed to expand and encourage trade.