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Has shipping become commoditised?

Has shipping become commoditised?

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Some argue our industry always has been while others reckon massive failures like Hanjin have halted the process.

It’s a common gripe you’ll hear at many a shipping conference from traditional owners. Shipping has become commoditised – low barriers to entry make it open to all and sundry.

Kenneth Koo, chairman of the 100-year old TCC Group, is someone who regularly brings up this thorny issue. The Hong Kong owner says that since the global financial crisis shipping has become commoditised following the collapse of barriers to entry.

“Our industry is now obsessed with short term returns and not long term strategising,” he says.

Many banking analysts agree.

“In our view, ships are commoditised assets, and like any commodity, the cost to produce is the long-term driver of price. The implication of this means that focusing on expected rates and expected returns is the wrong way to value a vessel. Long-term, shipping rates are arguably just shipowners’ cost of capital on top of this commoditised price,” JP Morgan said in a recent shipping report.

“Although much has been made of their dependence on risk and pricing models, banks certainly do distinguish between shipowners as counterparties, and individual ships as security. In an oversupplied market, we believe that charterers are increasingly discriminating, and better operators and ships can earn more – at the margins this can make a big difference,” says Peter Illingworth, managing director of Deutsche Bank Asia.

Providing some history and perspective on the matter is Dr Martin Stopford, the president of Clarkson Research.

“Fifty years ago, most of shipping was differentiated, especially liners,” the famous shipping analyst tells Maritime CEO. “But my sense,” he adds, “is that the creeping commoditisation of merchant shipping has gathered pace over the last 40 years.”

Tankers and bulkers took a big step in that direction in the 1980s recession as lack of timecharters and the growth of the spot market forced them to turn their attention to trading ships not cargo, Stopford relates. “This was good for cargo which benefitted from plentiful cheap transport,” he says.

Containers followed a different path. In the 1960s liner companies still used the ubiquitous rate book which charged different rates for different commodities. But companies were terrified that containerisation would commoditise freight.

“They were right and today, as they feared, rates on container routes are mostly commoditised,” Stopford says.

Quite so, agrees Tobias Koenig from Lexington Maritime, container shipping in particular has become commoditised.

“When you look at the fact that there just three global alliances serving the big trade lanes, it doesn’t really matter a lot, which carrier you choose,” he says, adding: “The transport unit is the box. And to the box, it doesn’t matter, which ship it is carried on.”

Koenig points to aviation where passengers generally always pick the cheapest carrier, as shippers do when selecting a container line.

Shipping consultant Lars Jensen writes in his new book, Liner Shipping 2025 – How to survive and thrive, that while there are some exceptions, port-to-port container services are becoming more commoditised. “It only requires a single major shipping line to succeed with digitisation and automation to accelerate the commoditisation,” he writes.

Kris Kosmala, from software firm Quintiq, reckons shipping is not fully aware just how commoditised it is becoming.

In Kosmala’s opinion, the products attributable to shipowners became indistinguishable in terms of attributes and ended up as commodities in the eyes of shippers, which is a typical outcome of the commoditisation process. The decisions by container lines to shed their inland transport units, exit the chassis business, and disgorge ownership stakes in marine terminal operations have all expedited the process.

Maersk’s attempts to reestablish the connection between the ship and the business of shipping by assuring end-to-end carriage of goods by whatever means including sea, road, and air is a significant change of attitude, according to Kosmala. Maersk’s decision to reunite its land logistics arm, its terminal business and its ships is being pitched as a way to reverse commoditisation.

“Obviously, not all shipping lines believe in this approach, so over the next few years we will have a chance to compare the strategies and see their effects on the balance sheets,” Kosmala says.

However, for some this perception of encroaching commoditisation is changing.

Basil Karatzas, who runs Karatzas Marine Advisors in New York, says that shipping has always been commotidised. However, he goes on to add: “I think the secret is how to uncommoditise it.”

Karatzas highlights Maersk’s ad campaign which shows a ripe yellow banana, implying that its service stands out, forging a brand name based on service.

Karatzas is not alone in observing the seismic shift in shippers’ perceptions of shipping in the wake of the recent demise of South Korea’s Hanjin Shipping.

“It took a Hanjin failure to have customers really ask whose ship actually will do the shipping. Before that, it was strictly commodity shipping,” he says.

Quite so, concurs Khalid Hashim, the veteran managing director of Thai bulker concern Precious Shipping. Hashim cites American professor and author Philip Kotler who famously said: “There isn’t any brand loyalty that 10 cents can’t buy”.

“This is true to an extent for any commodotised business and dry bulk is very much part of this system,” Hashim says, before concluding: “However, when game changers like Hanjin going bust hit the market, it brings counterparty risk back into the equation and large, serious players start to pay more than the proverbial 10 cents extra for the brand/reputation that good players have built.”

This article first appeared in the most recent issue of Maritime CEO magazine, which you can access for free by clicking here.

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1 Comment

  1. Andrew Craig-Bennett
    May 24, 2017 at 2:00 pm

    The route away from commoditisation is branding.

    The cruise sector is highly “brand aware” because it sells to the consumer; the rest of shipping is essentially “B2B”, and brand awareness hardly exists. I think we can all agree that margins are rather better in the cruise business…

    Maersk have been playing with their “visible pipeline” idea for – what – thirty years, now, but they have picked it up and then dropped it and then picked it up again. If the brand is not convinced by its own branding, will anyone else be?

    Evergreen are in much the same boat – they were strongly branded as the line that did more for the smaller shipper, but that seems to have faded a bit.

    Pretty much every container that isn’t owned by a leasing company has a shipping line’s name or logo on the side but whilst this means that most consumers and voters know these names, they have no idea of what they signify or how to use the information that the names seek to convey.

    As for tankers, generations of oil company executives have grown up with the idea that the very last thing that their brand needs is identification with a tankship.

    What about dry cargo? If I were to say “Gearbulk”, most people would recognise that brand, but even that is fading a bit.

    If a brand is worth no more than ten cents, according to Kotler, that ten cents is worth having, and if as some say we are becoming dis-intermediated, then that ten cents, or eight cents, becomes more important, not less. The point of a brand is that the customer buys what he knows and without an expert to do his buying for him she or he will go for the known brand

    “The fault dear Brutus lies not in our stars,
    But in ourselves, that we are underlings!”