Here’s a story about an artist. Her name is Rebecca Moss. Earlier this year, Moss won an artist’s residency—and promptly became stranded in the middle of the ocean. These facts are interrelated. Rebecca’s residency was aboard the Hanjin Geneva, a massive cargo vessel belonging to the Hanjin shipping conglomerate. During the middle of Moss’s residency, Hanjin declared bankruptcy, and the artist spent weeks trapped on a vessel that would not dock for fear of being seized by creditors.
This is a funny story (it was even featured on NPR’s “Wait, Wait, Don’t Tell Me“), but it masks a dreadfully serious problem. The global shipping industry is in crisis. There are too many ships, not enough cargo, and now a major player is underwater. Enterprises may be enjoying low shipping costs, but they should consider the following: In addition to a bemused performance artist, the Hanjin Geneva could carry up to 5,612 twenty-foot shipping containers. None of those were delivered on time. All told, Hanjin’s bankruptcy stranded 66 ships and delayed the delivery of $14.5 billion worth of goods.
How Did We Get Here?
The shipping industry is in crisis. It’s strange to think about—the world economy is growing again (3.4% according to the IMF), albeit slowly, commerce is booming, and more goods are moving from place to place than ever before. The global recession of 2008 has had an extremely long tail, however, and its effects have careened into the shipping industry with the inevitability of an iceberg.
The main problem with global shipping right now is overcapacity. It takes a relatively long time to build a container vessel—it took an entire shipyard over a year to complete just three of Maersk’s gargantuan Triple E container ships, for example (one of these ships is already sitting idle due to overcapacity, by the way). Therefore, most shipping construction must be scheduled well in advance. As it turns out, a lot of shipping capacity was scheduled to be constructed just as the bottom began to fall out of the market at the end of the 2000s.
As a result, the global shipping industry is struggling to align supply with demand. By the end of this year, the industry will have scrapped a number of ships equivalent to 500,000 twenty-foot shipping containers of capacity (TEU’s, for short). Another 1.5 million TEUs will sit idle—but the industry still can’t find daylight. Shipping prices remain too low for carriers to make much of a profit, and even the collapse of Hanjin failed to move the needle upward.
How Does This Get Fixed?
Look for the shipping industry to begin consolidating massively over the next few years. Various shipping lines are already beginning the process by sharing space on their various vessels. A more formal M&A process can only follow shortly—either that, or the conglomerates that survive the shipping contraction will simply buy up the assets of their bankrupt competitors. Either way, prices may not rise again until nearly the 2020s.
Enterprises that rely on container shipping should prepare for shocks. Remember, Hanjin’s collapse delayed the delivery of billions of dollars’ worth of merchandise. It’s possible that this might even be the reason for a massive bottleneck in iPhone 7 deliveries this year. Therefore, businesses should consider that their usual providers may go out of business. Either they could fail due to bankruptcy, or disappear into a merger and become an entirely new entity with a different fee structure, an altered shipping schedule, and a new set of brokers.
Successful businesses must be able to navigate these shocks. In order to prepare for an era of shipping disruption, and to learn how to interpret a complex and shifting web of regulations and tariffs, check out our report, “Reducing Global Logistics Cost With Benchmarking And Shipping Container Pricing Strategy.”