The great commoditisation debate

The great commoditisation debate

Panos Patsadas from Target Maritime Transport shares his thoughts on our ongoing discussion about the commoditisation of shipping in what is by some way today’s must-read on Splash.

Following the great debate raised on this site on the commoditisation of shipping, it is clear that various participants in the industry perceive commoditisation in very different ways. Traditional owners perceive it as the high number of new entrants and the elimination of barriers to entry. Academics perceive it as a partial change in the business model, whereas consultants consider ‘branding’ to be the face of commoditisation, and the main reason behind cases like Hanjin.

I will refrain from adding another definition of my own, as I believe the contributors have more than covered different dimensions of the term. Instead I will share some of my thoughts on the structural foundations of shipping, and why I personally feel that ‘back to basics’ is the remedy against the commoditisation of shipping, whichever way one defines it.

I cannot help but think of containers as the most commoditised market in shipping. A perfect example of an oligopolistic market, where differentiation in service between the big three, (if there is actually any), is hardly noticeable. And here starts the first paradox for me. As a shipper, you are willing to pay the same price for shipping a 20′ box with a Lamborghini in it from Europe to the Far East, as the guy who ships a 20′ full of garbage. In other words, what commoditisation does wrong to start with, is that it wipes out completely the concept of ‘value of the cargo’. If you forget about this basic concept, it is very easy to fall into the trap of going for cheapest, taking quality of service for granted. On the contrary consider crude, product tankers, LNG, chemicals, and see the shippers’ approach when the value of the cargo is high. No risks taken, full background a must to contract, and financial dislosure, performance bonds mandatory if you intend to become a regular carrier. So commoditisation in my eyes, occurs first when the concept of value is forgotten. When the idea of value is present, irrespective of cost of shipment, then actions such us due diligence, and counterparty risk assessment, follow naturally.

Second, and I will share the concern of traditional owners here, no barriers to entry, has turned the assets into the main commodity of shipping, and not the expertise. Shipping traditionally requires three things. The asset, the contacts, and the know-how. The entry of private equity and external players, with little interest in know-how or building lasting relationships, has actually tilted the scale in favour of asset play at the expense of the traditional model. We have seen in the last two years entire fleets being traded, ending up in all sorts of hands, so long as the creditor doesn’t have to write down a loss. The actual operation of the ship, which in essence represents the ‘know-how’ part of shipping, becomes a secondary concern and in some cases is reduced to a mere necessary evil. Some of the PEs engaged in shipping, accept trading at a loss for a prolonged period, at levels that no traditional owner would accept (out of principle), even if they could afford it. That alone disrupts the traditional model a great deal by prolonging necessary market corrections, the latest downward cycle (longer than all past ones) being a prime example. Bottom line, nowadays if you can afford it, you can become a shipowner. I will agree with Basil Karatzas that “how we uncommoditise” is the key. Banks have already revised their approach to lending, with background (i.e. ‘know-how’) being much higher on the checklist than 10 years ago. This will deter some potential entrants, and force a few existing out, albeit too late as external money keeps being pumped in from ambitious investors seeking short-term returns. In essence, decommoditisation in my opinion means bringing the know-how back into the model.

Finally, we cannot discuss shipping and not consider it as a part of the logistics chain. The example cited by Kris Kosmala of Maersk taking control of the entire transport end-to-end, as opposed to other lines divesting their terminal and port assets, shows that some players see the future in going back to their core business, whereas others are trying to maximise the range of services they offer to the clients. Offering a door-to-door service to the client, in my opinion tends to commoditise shipping a lot more. Services that are required for a commodity to go from A to B, when bundled into one brand, accumulate all know-how into one link of the supply chain. This means that other parts of the chain, like the shipper or the receiver require less know-how on how their goods get to B from A. Less knowledge means less scrutiny and one-size-fits-all services are much more likely to compromise know-how along the chain.

To summarise, I believe that the three ingredients of traditional shipping, the asset, the contacts, and the know-how, the concept of value and how these have been compromised along the different sectors, is what has led to commoditisation. Again, a few people may argue otherwise, but being a fundamentalist, I do believe that when a model goes wrong, going back to basics is the key to finding answers.

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1 Comment

  1. Jan Zavesky
    May 26, 2017 at 6:55 pm

    The greatly articulated opinion in The great commoditisation debate, Panos Patsadas. As you expect, there will be some people who will argue, depending on which bench they sit, but there will be, I personally hope more, who will agree.
    When things go wrong and especially when you are quite not sure where you shall turn seeking the improvement, it will be natural to turn to basics and review your model from scratch.
    If I understand you well, and can’t but agree, the cruicial here is the know-how as catalysator for change to better. What I am afraid is that assets focused models from recent has contributed to the fact that the “carriers” on know-how has been disposed off as redundant. And in our environment is not much left where to look to get the reliable solid and experience based expertise back from.