Maritime carriers are leaving up to US$110 on the table every time they carry a box on the Asia-Australia trade route, according to research from startup MizzenIT. And that means ocean carriers could be missing out on hundreds of millions of dollars a year by not charging the right price.
And that figure could, potentially, be applicable to other trade routes too.
Glenn Butcher is a venture capitalist and the chairman of MizzenIT. He told FreightWaves that if the number of TEUs shipped on the spot market was multiplied by US$110, then “it’s a very large number. It’s indicative of the opportunity,” he said.
Butcher added he was “surprised at the bottom-line impact. No fundamental change is required. New ships aren’t required. It all flows through to the bottom line.”
Ocean container shipping companies miss out on generating hundreds of millions of revenue dollars each year
There are a few estimates as to how big the world container trade is by box volume, which is expressed in twenty-foot equivalent units (TEUs)**. For instance, in an October 2019 update, DHL Global Forwarding gives a global container trade estimate this year of about 151.2 million TEU.
We can further understand the context by looking at the accounts of a large ocean container shipping company such as Hapag Lloyd. The liner company carried just under 11.9 million TEU in 2018. Digging into the 2018 accounts reveals that Hapag Lloyd directly earned EUR 10.5 billion (US$11.6 billion) from the transport of ocean shipping containers.
Assuming 30% of its boxes are carried on the spot rather than the contract market means that just under 3.6 million of the total boxes carried had variable rates. Assume further that Hapag Lloyd missed out on US$110 on each of those spot market boxes.
That’s roughly an extra US$391.8 million that the company (theoretically) has left on the table.
A pretty good boost to profit
There’s a lot of assumptions there, but it does give an indication of the potential size of the opportunity. And, while the extra monies raised would be written into the account books as revenue, as there are no extra costs associated or incurred in generating that revenue it would immediately boost profits.
Hapag generated US$1.35 billion in earnings before interest taxation and depreciation in 2018. The money left on the table would boost EBITDA to just over US$1.74 billion.
That’s a 29% increase.
It’s a pretty good boost to profit for simply charging a more market-calibrated price.
Frustrated with stagnant prices
MizzenIT founder and managing director Jon Charles, a former ocean container line trade manager, explained the origin of his search for liner shipping’s lost opportunities.
“Anecdotally, and because of my background, I knew there was a disconnect. … Back in my time as a trade lane manager, we had all this cargo backlog on the wharf. But prices didn’t rise! I was frustrated,” Charles told FreightWaves in an interview.
This massive opportunity cost of US$110 per TEU shipped is being incurred because of outdated practices used by the international ocean shipping industry. Charles elaborated on why ocean shipping companies have not exploited this revenue opportunity.
Supply, demand and price disconnect
In a written statement, he explained that ocean shipping prices are set by date and not by ship’s voyage. As any slot on any vessel can be booked by date, regardless of whether the ship is empty or full, there “is a disconnect between price, supply and demand.”
Secondly, there is little in the way of “market-wide” data on cargo demand, shipping capacity and price, which means that prices are set based on a shipping company’s internal data. While he acknowledged that various consultants and other parties have tried to create freight rate transparency, these tend to be focused on one trade lane.
Charles queries, for instance, how one trade lane on the Shanghai Containerized Freight Index, which gives freight rate information for the Shanghai-Melbourne port pair for a 20-foot box, can be representative of the whole of Oceania.
Current pricing is just a “best estimate”
Charles pointed out that the SCFI doesn’t give details for other port pairs or container types, such as, say, for a 40-foot high cube from Wenzhou, China, to Sydney.
“Pricing is a best estimate only and [is] not driven by broader, real-time data, which, until now, has only been available weeks after the given trading period,” Charles noted.
Finally, Charles argues, shipping lines offer limited product choices. He pointed out that customers can take the spot price but then forgo booking certainty in the peak season. Or, alternatively, they can contract but then forgo the price flexibility of the spot.
“These factors all combine to lower efficiency, and ultimately, profitability,” Charles wrote.
Methodology… how to find all the missing money
MizzenIT set out to discover just the size of the opportunity cost. After receiving a federal government grant from the APRIntern programme, Charles got in touch with the Centre for Artificial Intelligence at the University of Technology Sydney (UTS) in Australia. Associate Professor Farookh Khadeer Hussain and PhD candidate Ayesha Ubaid worked to model the interactions between the Australia-Asia container trade lane, shipping capacity and TEU volumes. They used artificial intelligence to develop a price-prediction system.
MizzenIT modeled weekly shipping capacity using actual vessel-in-trade data. Cargo demand was also modeled. Data sources included port authority data, the SeaIntel TCO report, the Shanghai Containerized Freight Index (Australia/New Zealand route) and MizzenIT’s own price database.
Next step: just how much revenue are ocean carriers not catching?
The next step was to figure out the opportunity cost.
“The opportunity cost is deemed as the variance between the SCFI price and calculated optimal price multiplied by the percentage of cargo carried on the spot market and therefore open to the levied optimal price.
The assumption taken was 30% of cargo carried on the Asia/Australia trade could be charged at the optimal price each week,” Charles wrote.
That allowed MizzenIT to discover the hidden price gap in ocean container shipping, which, in 2018, was US$110 per TEU.
“I knew it was going to be significant,” Charles told FreightWaves. He added, “It reinforced what we are going to do as MizzenIT.”
Digitalization will transform ocean shipping
MizzenIT was set up to help bring transparency to the shipping market by providing dynamic pricing and rates information. Both Charles and Butcher see MizzenIT as being at the forefront of a transformative digitalization of the shipping industry.
They gave examples of how digitalization can help improve the ocean shipping industry. For instance, Butcher and Charles said that five of the top 12 ocean carriers won’t let a potential customer instigate a rate inquiry or quote from their homepages.
They also pointed out that ocean carriers in Australia operate out of Melbourne and Sydney on the east coast but that a lot of customers operate out of Perth on the west coast. There’s a time zone difference of about four hours. It’s a bit like, say, the time and distance difference between Los Angeles, California, and Jacksonville, Florida.
Potential liner shipping customers “make a pricing request but no one answers the phone as carriers have gone home,” Charles said.
Shipping is focused on efficiency and not revenue growth
When FreightWaves asked why, in today’s world, not all of the main shipping companies offer live quotes and do not run 24-7 booking operations, Butcher said that the shipping industry has been focused on efficiencies and not on growing revenues.
“Cost is controllable,” Butcher said.
Charles also argued that shipping companies have tended to look at digitalization as an information technology project.
“IT is about cost saving. Digitalization is about revenue streams. Too many look at digitalization as an IT project. There’s a shift in mentality though. People are bringing in outside expertise. We met our first chief digital officer in Singapore a few years ago. There are a few leaders — Maersk, CMA CGM and so on,” Charles said.
MizzenIT helps shippers, forwarders and carriers tackle these problems through its digital platform. Interested shippers and forwarders can hop onto the MizzenIT platform and search ocean schedules, get live shipping line quotes and book. Carriers provide pricing and rules around pricing; meanwhile, MizzenIT automates quotes on behalf of the carrier.
For instance, interested parties can get more than 100 instant southbound port-pair rates from ocean shipping carrier ANL. The company works with a variety of ocean carriers including APL, CMA CGM, Evergreen, Hapag-Lloyd, Hamburg Süd, HMM, Maersk, MSC and OOCL.
MizzenIT was set up in late 2016. Neither revenues nor profits of the company are disclosed, although FreightWaves was told that the company has 120 freight forwarders as customers in Australia along with some mid-tier multinationals and small to midsize enterprises.
“We want to change the world”
It’s still very much early days for MizzenIT. So far the founding groups and high net worth individuals have chipped into the seed funding of MizzenIT. There are no concrete plans for an investment roadshow and there is no institutional money in MizzenIT — “not yet. But we are open to it,” Butcher said.
FreightWaves quizzed Butcher and Charles on the end game for MizzenIT, such as a trade sale or an IPO.
“There’s lots of goals and options. Nothing is ruled out. We’re driven by a desire to change the industry. We want to change the world,” Butcher told FreightWaves.
** Note: this story was altered on Wednesday October 10, 2019 when the port throughput data in China (and the U.S.) was removed from the point in the story marked with a double asterisk and replaced with an estimate of the volumes of globally shipped containers.
While there was no actual error in the original story, some readers expressed concern about potential double-counting owing to, for instance, the river-to-seaport export trade in China or a box being counted twice – once at the port of loading in China and again at the port of discharge elsewhere.
This had been addressed in the processing and reporting of the Chinese data, however, to address reader concerns of double-counting, the Chinese data was removed and replaced with a single global container trade estimate instead.