COMMENTARY: Consolidation trumps Trump

Shipping industry far more impacted by historic 2016 than any Trump policy in last two months    It’s been more than two months since President Donald Trump was inaugurated as the 45th President of the United States and since then, the current administration’s protectionist economic policy has dominated much of the news cycle, and with everyone wondering aloud “what does this mean,” it’s a good time to examine what’s actually happened and how it has affected the international shipping industry.
   Until now, the administration’s stance on the economy has had very little impact on the international shipping market – but there are several reasons for that. Since the bankruptcy of ocean shipping giant Hanjin last July, the ocean carrier industry has experienced major shifts in alliances, acquisitions and mergers.
   Here’s a quick snapshot:

   • February 2016: The China Cosco Shipping Corp. was officially launched in Shanghai and represents the merger of China Ocean Shipping Group and China Shipping Group with a combined fleet of 832 vessels.
   • June 2016: CMA CGM assumed control of Neptune Orient Lines, parent company of APL, the industry’s biggest acquisition in a decade.
   • July 2016: Hapag-Lloyd and United Arab Shipping signed a merger agreement, becoming the fifth largest container shipping company globally.
   • November 2016: Japan’s 3 biggest carriers, Nippon Yusen KK (NYK), Mitsui OSK Lines (MOL) and Kawasaki Kisen Kaisha (“K” Line) announced their merger and will become the sixth largest international player when their merger becomes official in July 2017.
   • December 2016: Maersk Line reached an agreement to acquire German container shipping line Hamburg Süd.

   Because of recent mergers, alliances, and acquisitions, the top seven carriers will control around 65 percent of shipping capacity, according to Tim Smith, chairman of Maersk China. While there were 20 lines operating at the start of 2016, 2017 sees that number reduced to just 14.
   Many of these newly formed consolidations had yet to publish any of their route schedules or vessel sizes as of early March (though Adam Smith Project sister company BlueWater Reporting has up-to-date network schedules posted) and ocean rate contract negotiations are just getting started.
   Historically, under a two-tier negotiation cycle, mega beneficial cargo owners (BCOs) like Walmart and Amazon negotiate rates and determine capacity first, then non-vessel-operating common carriers (NVOs) follow suit. Once initial rates are settled with BCOs, steamship liness will know what their actual revenue is going be and what percentage of their capacity is left and available to freight forwarders. Until then – everyone is in a holding pattern.
   The lead time needed for any major decision to go into effect also plays a factor in the shipping market’s reaction to “Trump Economics.” A major route change or shift in industry mentality doesn’t happen because of a policy made 30 days ago. Shipping decisions are not made quickly, and most shipping companies worth their salt have, at minimum, a 10-year strategic plan. Any major shifts in the marketplace are not the result of a decision made yesterday.
   Long established trade routes and relationships based on supply and demand cannot change immediately. For example, China is the largest overseas market for U.S. exports and the United States is the largest importer of Chinese goods. This trade web cannot be untangled in a matter of months – and if it was, do we have enough manpower (in the garment industry, for example) to meet the industry’s requirements? Within 10 years, maybe. Four years? Not so much.

Any major shifts in the marketplace are not the result of a decision made yesterday.

   Trade deals, trading partners, and tariffs – oh my! In the months leading up to election and following his inauguration, Trump pledged to withdraw from or renegotiate any international trade deals that didn’t fulfill the administration’s goal of rejuvenating the domestic manufacturing sector. The Trans-Pacific Partnership is no more, the North American Free Trade Agreement (NAFTA) is on the chopping block, and rumblings of an increase in import tariffs are getting louder.
   So how does this affect shipping?
   Shipping is static in a global economy. The only thing that changes from renegotiated trade deals is the direction of the supply chain. Trade deals may help dictate the direction of the marketplace, but demand is still there and the amount of shipping required doesn’t decrease. The question isn’t how much, but where to.
   While demand is still a constant, the direction may indeed be shifting. Fortune Magazine reported that China has overtaken the United States as Germany’s biggest trading partner. While German imports from and exports to China rose to €170 billion, the United States fell to third place at €165 billion.
   It is my opinion that Trump’s tariff proposal is more of a scare tactic, rather than economic, meant to push businesses back into the United States. But if Trump delivers on his promise, there will likely be fewer shipments to the United States, at least at first. Shipping is shipping, it’s not reliant on a single destination and is prepared for any major market disruptions.

   The shipping hangover of 2016 – otherwise known as 2017. On an international level, the shipping industry is still reeling from the mass consolidations that took place last year – and that is what will have the greatest impact on profitability and success.
   After the Hanjin collapse, thousands of containers were stranded. Companies affected by this were faced with the decision to shut down their product line and wait, air freight their product to make up for the delay, or double purchase. Last year was more of a fight to recover. This year the upheaval is going involve reworking logistics plans to accommodate the new consolidations.
   Alliances and consolidations lead to a reduction in shipping capacity and potentially an across-the-board rate increase for steamship lines, but that doesn’t guarantee profitability. People can easily shift their supply chains to avoid high carrier rates. That’s capitalism. Just because someone says they are going to have higher rates doesn’t mean the consumers is going to pay as there are always choices.
   A boost of confidence in the U.S. economy has strengthened the dollar and combined with weaker markets overseas, We’re seeing a drastic increase in exports from regions such as Europe, and a decrease in container exports from the United States. Much of 2017 is going to be a reeducation and reshuffling of the international supply chain, but freight forwarders have dealt with market disruptions and shocks in the past. That’s our job, to troubleshoot and find the best solutions for clients – and 2017 will be no exception.

Gary Cardenas is president of TOC Logistics International