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First Things First: The Fastest Five Recap – February 2022 Edition

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First Things First

The Fastest Five Recap - February Edition

February 17th, 2022   ·   By Callum Berry

Will the shipping industry continue to make such astronomical profits?

You might have watched our recent new live show “First Things First” where Mercado CEO Rob Garrison covered some of the top supply chain news stories from the past month in a segment called the “Fastest Five.”

If you missed out on the show, don’t worry – you can catch up here.

Let’s delve a little deeper into the topics that Rob covered and look more at the how and the why of the matter.

A ship shape market

First off, shipping companies have made monumental profits over the past year as the industry has been thrown into turmoil. It wasn’t long ago that media outlets up and down the country were reporting about mass port congestion – and this doesn’t look to be slowing down. The question is: will profits continue as importers look for smarter, more cost-effective ways to move their products?

Here’s a quick anecdote. Back when Conrad Everhard was the chairman of OOCL, he infamously attended an investor conference where an attendee asked him if it was “possible to make a small fortune in the shipping industry?” His response? “Absolutely man, as long as you start with a large one!” The reality at the time was that shipping was a costly venture to get into. There were great rewards for those who could afford it, but not without years of investment and customer relations.

Fast forward to today and Greg Miller, senior editor of American Shipper, recently covered how “container shipping [is having the] greatest quarter ever - with more to come.” In the article, he correctly highlights how the “supply chain congestion is proven to be an unprecedented money making machine for carriers” and that the opportunity for new-movers to disrupt the status quo.

Shipping companies have achieved some incredible things this year. Here are just some of the highlights:

  • Ocean Network Express (ONE) made so much profit in 2021, that their single quarter earnings exceed full quarter earnings pre-covid. The firm reported profits of $4.9 Billion USD for the Q3, up 418% from the same period in 2020.
  • Hapag-Lloyd announced an extraordinarily strong Q4and full year results, with their full year 2021 totalling $12.8 billion – over four times the $3.1 billion earned in 2020.
  • Evergreen made $5.6 billion for Q4 in 2021, more than tripling their prior Q4.
  • Cosco made $14 billion for the year, nine times their profit the year prior, in addition to one of their latest acquisitions, OOCL, which reported revenues of $15.68 billion, up 110% from 2020.
  • Maersk made a full year EBITDA (earnings before interest, tax, depreciation, and amortization) of $24 billion, almost triple the $8.2 billion they made in 2020.

It's a self-fulfilling prophecy

Statistics are enlightening, but they don’t answer why the market is experiencing such big changes, or how companies are making such huge profits.

Bloomberg reported that the boom causes are two-fold: ”an economic reopening after Covid that has spurred surging demand for goods and raw materials.” While the pandemic has caused fluctuations in up- and down-stream operations—fueling the supply and demand tension—it has also given rise to an exponential rise in consumer consumption. With more product demand putting a strain on a finite number of vessels available to haul goods around the globe, basic economics will tell you that price is only going to go in one direction.

The result is a self-fulfilling prophecy, as further strain causes cracks to appear across the entire gamut of the supply chain. While it’s logistics and demand functions that are feeling the full force of the aftershock right now, we’ve already seen glimmers of the first mile starting to feel the heat too.

Charting a new course for the future

It should come as no surprise, therefore, that importers are devising new ways to circumvent the cost rather than simply pass them onto their unimpressed customer base. In a move echoed around other savvy companies, Taiwanese furniture manufacturer Locteck is shelling out $32 million to build its own 1,800 TEU cargo ship in partnership with Huanghai Shipbuilding. The company said it made the purchase to combat shipping delays and meet a surge in online sales. The real test will be whether the industry has returned to some kind of “normality” by the time it’s completed.

Companies including Coca-Cola, Target, and Costco have also begun to charter their own vessels, shifting away from relying on third party carriers and forwarders and bringing logistics functions in-house.

The Biden administration has been vocal about its work with major U.S. ports to help rectify slowdowns and reported in November that the U.S. Army Corps of Engineers will begin $4 billion worth of construction work at aging coastal ports within the next two months.

In a statement by the White House, the Biden-Harris Action plan promises to:

  • Support creative solutions to current supply chain disruptions by allowing for flexibility in port grants
  • Alleviate congestion at the Port of Savannah by funding the Georgia Port
  • Launch programs to modernize ports and marine highways with more than $240 million in grant funding within the next 45 days, alongside a host of other policies

It’s certainly a step in the “right” direction, however if truth be told, it’s hard to picture the supply chain going back to “normal” anytime soon.

Maersk is making moves – and others will follow

And finally, Nick Savvides of The Load Star has predicted that “Maersk looks set to cut out freight forwarders to attract larger BCOs.” The Danish carrier has made no secret of its ambition to become the “integrator of the seas.”

“Forwarders have been, are and continue to be one of the biggest customer groups we have on our ships” it recently said, openly sharing the brand’s plan to diversify its core offering into the forwarding space.

James Hookham of the Global Shippers Forum speculates that Maesrk may launch a trading platform to develop its integrated approach to supply chains and further automate the shipping process by cutting out the middleman. However, he argues that there will likely still be demand in the market for the more personalized, hands-on approach that forwarders provide.

We’ve seen technology change the shape of the forwarding world in the past few years, but the dynamic between key market players has continued to remain: namely, between carriers and forwarders. The future therefore looks like it will remain fairly secure for both parties, despite many carriers (such as Maersk) looking to show their considerable weight.

Catch-up on the live show

To watch the full episode of First Things First, head over here.
To subscribe to the podcast (available wherever you listen to yours), click here.

We’ll be back for the next installment of the Fastest Five on Episode 2 of “First Things First-light”on Tuesday 8th March 2022. Sign up today over at The Lab.
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