The ocean freight industry is facing multiple challenges that are driving significant changes in the way carriers operate. From environmental concerns to digitization and automation, and increasing price competition, carriers must navigate a complex landscape to remain competitive and profitable. With governments and consumers increasingly focused on sustainability, carriers are under pressure to reduce their carbon footprint, adopt more sustainable practices, and implement sustainability clauses in their contracts. At the same time, the COVID-19 pandemic has accelerated the adoption of digital platforms and automation, as carriers seek to improve efficiency, reduce costs, and increase visibility. Lastly, consolidation and new technologies are driving increased competition in the market, forcing carriers to compete on price while finding ways to reduce costs and improve efficiency. Let’s explore these challenges and the strategies carriers and shippers can adopt to navigate the changing landscape of the ocean freight industry.
The focus on environmental sustainability in the ocean freight industry has been growing steadily over the past few years. With increasing concerns about climate change and its impact on the planet, governments and regulatory bodies around the world have been putting pressure on the industry to reduce its carbon footprint and adopt more sustainable practices.
One of the most significant ways in which carriers can reduce their environmental impact is by using low-carbon fuels. Currently, the majority of vessels in the industry run on heavy fuel oil, which is a significant source of greenhouse gas emissions. However, there are alternative fuels available that are significantly less polluting, such as liquefied natural gas (LNG) and biofuels. These fuels emit fewer pollutants and have a lower carbon footprint than traditional fuels, making them a more sustainable option.
Another way in which carriers can reduce their environmental impact is by implementing more efficient vessel designs. Newer vessel designs can be more energy-efficient and emit fewer pollutants, which can help to reduce the industry’s carbon footprint. For example, some carriers are now investing in vessels with hybrid or electric propulsion systems, which are significantly more efficient than traditional propulsion systems.
In addition to these practices, carriers may also push for contracts that include sustainability clauses. These clauses can include commitments to reducing carbon emissions, using sustainable materials, and implementing sustainable practices throughout the supply chain. By including these clauses in their contracts, carriers can demonstrate their commitment to sustainability and differentiate themselves from their competitors.
Ultimately, the focus on environmental sustainability in the ocean freight industry is not just driven by regulatory pressure, but also by consumer demand. As consumers become more aware of the environmental impact of their purchases, they are increasingly looking for sustainable options. By adopting more sustainable practices, carriers can meet this demand and position themselves for success in the future.
Digitization and Automation
The COVID-19 pandemic has had a significant impact on the ocean freight industry, accelerating the adoption of digital technologies and automation. The pandemic highlighted the need for more resilient supply chains and increased the demand for real-time data and visibility. As a result, carriers have been investing in digital platforms and automation to improve the efficiency and agility of their operations.
Carriers are more commonly adopting digital platforms for booking and tracking shipments. These platforms allow shippers to book and manage their shipments online, providing real-time visibility into the status of their cargo. By adopting these platforms, carriers can streamline their operations, reduce paperwork, and improve communication with their customers.
In addition to digital platforms, carriers are also investing in automation to increase operational efficiency. This includes the use of robotics and artificial intelligence to automate certain processes, such as cargo handling and documentation. By automating these processes, carriers can reduce costs, improve accuracy, and increase the speed of their operations.
The adoption of digital technologies and automation in the ocean freight industry is driven by the need to improve efficiency, reduce costs, and increase visibility. By adopting these technologies, carriers can improve the customer experience, reduce the risk of errors, and increase the speed of their operations. As a result, we can expect to see an increased focus on digitalization and automation during the current contract season and beyond.
Increasing Price Competition
In recent years, the ocean freight industry has seen a significant increase in competition between carriers. With more carriers entering the market, established carriers are facing pressure to compete on price, which can lead to a squeeze on profit margins.
One of the main drivers of this competition is the ongoing trend of consolidation in the industry. Over the past few years, we have seen a number of mergers and acquisitions among major carriers, which has led to a reduction in the number of players in the market. This consolidation has created a more concentrated market, with fewer carriers controlling a larger share of the business. As a result, carriers are increasingly competing on price to maintain their market share.
In addition to consolidation, the rise of new technologies and digital platforms we discussed above has lowered barriers to entry for new players. Startups and tech companies are entering the market with innovative solutions that are disrupting traditional models of ocean freight. These new players are often able to offer more flexible and efficient services, putting pressure on established carriers to adapt or risk losing business.
The increased competition is putting pressure on profit margins for carriers, who are struggling to maintain their margin while still competing on price. This pressure is being felt across the industry, from small regional carriers to the largest global players. To remain competitive, carriers are looking for ways to reduce costs and improve efficiency. This can include investing in new technologies, optimizing routes and vessel capacity, and streamlining operations.
For those looking to move freight, the increased competition can be both a blessing and a curse. On one hand, the competition can lead to lower prices and more options for shipping goods. On the other hand, it can also lead to instability in the market, with carriers coming and going and pricing fluctuations that can impact supply chains.
Overall, the increasing competition between carriers is a trend that is likely to continue throughout 2023 and beyond. Carriers will need to adapt to this new reality by finding ways to remain competitive while maintaining profitability. For their customers, the key will be to stay informed and agile, adapting to changes in the market and working with carriers to find the most cost-effective and efficient shipping solutions.
The shipping and logistics industry is always changing, like everything else. Businesses adapt to shifting conditions, and the past few years have certainly altered the landscape. Whether they’re environmental improvements, digitization and automation, or simply decisions or investments intended to stay competitive, you can safely bet that businesses will do what they can to meet the market’s demands. But keeping up to date on these kinds of changes and how they’ll impact your business is extremely difficult—and potentially expensive. We recommend working with a partner who can help you find the best possible solutions for you, regardless of what’s changed. Let’s talk about how we can help you.
Imports gained in March. What do experts say about the future?
Sales of imported products in the US in recent quarters have been declining, and businesses have been struggling to bounce back. Primarily, that decline has been driven by the huge volatility in consumer demand. First, we saw a tremendous spike in demand (to the point where bare shelves were common in the United States, something that hasn’t happened very often in recent years). Countless businesses stepped up their inventory order volume to meet the dramatically increased spending habits, but didn’t foresee the drop in demand that followed last year.
This decrease in imported products kicked off, deepened, and has lingered over the US for months. Concerns over a potential recession and high inflation have helped keep consumer demand lower than expected. All of this follows not only a panicked spending spree (the Great Toilet Paper and Hand Sanitizer Rush of 2020, for example), but a sustained period during which middle class Americans not only kept their jobs, but suddenly found themselves receiving more than one stimulus check. Those stimulus checks were treated like windfalls by those fortunate enough to keep their current jobs at their current rate, and a great number of them rushed out and spent them on big ticket items. Televisions, furniture, vehicles, etc.—durable goods. That means that these people don’t need to replace them for several years, so demand for a huge portion of industries has dropped. As a result, businesses were stuck with warehouses full of products they had trouble selling, so they cut back on their inventory order volume to compensate while they clear out existing stock. That reduction has shown itself in stark detail for the past several months, as imports have been steadily declining.
Does March mark a turning a point?
This past March marks a bright spot for US import volume: month-over-month, imports are up 6.9% compared to February, and even up 4.2% over March of 2019 (before Covid). That’s still down 27.5% over last March, but it’s giving some analysts even more reason to hope that consumer demand is beginning to rebound.
There was one additional interesting tidbit in this data from Descartes: the share of imports from China have dropped precipitously over the past year. In February of 2022, China’s share of US imports was 41.5%; as of last month, China accounted for only 31.6%. Whether this will hold or begin to revert in the future is unclear; the amount of uncertainty in the global economy makes it difficult to predict.
Regardless of the nation of origin for US imports, a number of analysts and experts are predicting (maybe optimistically) that the volume will keep climbing for the next few months. One analyst forecasts a 26.7% increase over March’s volume by the end of August.
What does this mean for US businesses?
While everyone’s hoping for a return to normalcy and stability, there isn’t exactly a mountain of positive data to start popping champagne yet. It’s undoubtedly a good sign, however, and there is good reason to hope for a business rebound. If businesses are stepping up their order volume, that logically indicates that they have a good reason to do just that.
Part of the reason for this volume increase might be the dramatically reduced freight rates. After a huge rate spike and the subsequent collapse last year, rates have been volatile, and businesses struggled to find shipping space at reasonable prices. Many of them were locked into long term agreements with carriers at much higher rates than were available on the open market just a couple of months after the ink had dried on their contract—and in some cases, it was less expensive to pay the penalty to break the agreement and go with spot pricing where they could find it.
Recently, global shipping prices have been low—maybe not the lowest in history, but close enough that businesses might be taking advantage of discounted freight costs while they have the opportunity to do so.
The second potential conclusion to draw from this is that businesses may have finally begun to chip away at their overstocked warehouses, to the point where they once again have ready space available for additional inventory. This could mean that consumer demand is beginning to rebound enough to free up more warehousing space, or simply that additional warehousing space has been made available at favorable rates—but experts are hinting that consumer demand has begun to pick back up, thankfully.
While we aren’t completely certain what the rest of the quarter or the next will really bring, the past several weeks have had enough bright spots to give a lot of businesses better hope for the future. It’s possible that we’ve reached the beginning of the “return to mean” stage of the market cycle, during which supply, demand, and profitability lose some of the volatility and once again reach stable ground. That less shaky territory will likely be a lot closer to where the US economy was before Covid kicked off in the West in March of 2020. While some businesses might miss the early days of the pandemic—which brought many of them higher sales than they’d ever seen before—an awful lot more will be grateful for a return to pre-Covid stability instead.
It’s been a perfect pricing storm for shipping and logistics companies. COVID-19 and subsequent rebounds, labor unrest, and supply chain disruptions have led to massive price volatility and wildly fluctuating shipping rates. For brands that rely on a steady supply chain, these pricing swings have been problematic—the trucking industry and other businesses that rely on a steady supply chain, for starters.
For the trucking industry, recent Pacific labor unrest led to slowdowns for many trucking companies, as East Coast ports struggled to keep pace with overflow from West Coast ports. The more backed-up ports became, the longer vessels waited, with less immediate cargo being loaded onto and delivered via truck.
Also impacted: shipping companies that launched amidst sky-high pricing in 2021 and 2022. With rates returning to a more comfortable mean, these teams can no longer afford to charter ships at above-average rates, even with full shipping loads.
Beyond that, many of these businesses are sitting on massive inventories they overpaid for just a year or two ago. With each charter, they’re losing money on both the charters themselves and the often-reduced rates for their existing inventory. Layer in market common market delays—with them, narrower windows surrounding holiday shopping and other peak periods—and the problem compounds even more.
Factors Impacting Shipping Rates
Labor considerations, price fluctuation, and inventory over-spends are just a piece of the volatility puzzle. Supply and demand naturally play a significant factor in shipping fees—the more in-demand a product, the more demand for freight services to move that product. As demand for space rises, so do prices. This constant push and pull between rising demand for specific goods paired with limitations on shipping capacity can impact volatility. During peak COVID-19 periods, decision-makers also needed to factor in lockdowns which disrupted cargo movement by delaying or reducing trips.
Also impacting pricing volatility:
Bunker Adjustment Factor (BAF) is a surcharge for shipping operators that compensates for fuel price changes. Implemented by the IMO, BAF was intended to cover all fuel charges—but the immediate trickle-down impacts overall price volatility.
Carrier costs have been consistently on the rise. Many carriers are adding charges to account for port congestion and environmental considerations. With more and more ports experiencing significant delays, carriers potentially lose out on other opportunities. These increases protect businesses should mass slowdowns happen.
Peak season surcharges happen during the holiday season. During these peak periods, carriers raise rates along with the spike in demand. In China, Chinese New Year is a major consideration for shipping fees—demand before and after this period tends to increase significantly, with people focused on getting goods to their final destinations as quickly as possible.
Trade agreements, strikes, wars, and other political events can cause ports to close down or even goods to become increasingly scarce in specific markets. This, then, drives demand and shipping prices up.
Global exchange rates can also impact pricing. In weaker currency countries, imports and exports become more expensive, while stronger domestic currencies readily increase international shipping and benefit from these less-expensive rates.
The Volatility Winners: Agile Supply Chains
While many businesses struggled to keep pace—and keep profitable—during pricing swings, others found ways to accelerate their growth and profitability. These companies specifically adjusted operations to account for pricing fluctuations, making them more profitable and competitive. With agile supply chains, these organizations were better equipped to handle rapid changes without missing a beat.
The takeaway, then? Price volatility will always be an X-factor in the shipping industry. To remain operational during these ups and downs, businesses must stay agile, rapidly adjusting to shipping rates and supply chain disruptions. This is especially true for trucking companies and other businesses that rely on a steady supply chain to remain profitable.
Achieving this level of agility, though, doesn’t happen overnight. Organizations must reassess their inventory management practices to avoid overpaying for inventory during high-rate periods. New technologies and partnerships with more agile logistics providers can help companies navigate price volatility hurdles better. By being proactive and implementing these best practices now, organizations can be prepared—and remain operational—in the face of future disruptions.
Consider the typical transport charter. A shipowner is tasked with moving cargo from point A to point B as quickly as possible, regardless of port traffic. Efficiency is so prized that, in many cases, customers will even pay additional for demurrage—waiting at anchorage.
Granted, there’s a downside. Ship owners are burning more fuel, rushing across the ocean, and waiting at their destination port. Those ships could wait two to three weeks or more between the anchor and holding zones at peak. While waiting, they’re earning those demurrage bonuses—and, simultaneously, burning even more fuel.
It’s a “hurry up and wait” approach, adding to the shipping industry’s emission problems.
The State of Shipping and Carbon Emissions
The shipping industry is responsible for about 3% of carbon emissions—on par with major carbon-emitting countries. Only the U.S., China, Russia, India, and Japan emit more CO2 than the global shipping industry.
Despite this massive environmental impact, carbon emissions from vessels are widely unregulated—and as a result, the shipping industry is on track to contribute 10% of global greenhouse gas emissions by 2050, with black carbon accounting for 21% of CO2-equivalent emissions from ships. But, not surprisingly, with limited regulations, post-COVID rebounds, and added profit incentives for speedy delivery, striking a balance that satisfies supply chain leaders and sustainability advocates has been challenging.
The IMO’s Push for Cleaner Cargo Transport
Now though, shipping industry leaders are being pushed to reimagine their charters. In January, the International Maritime Organization (IMO) began enforcing its Carbon Intensity Indicator (CII). The CII provides vessels with an annual reduction factor, ensuring continuous operational carbon intensity improvement. Annual operational CII must be documented and verified against these benchmarks.
Beyond CII, though, international cargo and container shipping has yet to do much to promote decarbonization. A common argument? It’s difficult, if not impossible, to find an efficient, effective, and readily available means of powering massive ships beyond fuel.
Through CII and other IMO-driven regulations, the organization is focused on a 50% reduction in industry emissions before 2050. But on the flip side, industry insiders anticipate increased trade to drive maritime volumes up significantly, fueling the “10%-by-2050” projections.
Decarbonizing The Shipping Industry
Beyond the IMO, port-level strategies that have already shown tremendous promise in helping reduce carbon emissions are being implemented. While not a perfect solution, “just-in-time” (JIT) arrivals—timed properly—could help reduce the industry’s carbon footprint. Using a JIT model, ports coordinate available resources, and incoming vessels manage their course, so they arrive in time for an open berth. While this limits wait times at the port, ships often wind up slowing down their journeys to ensure on-time arrival.
Likewise, “virtual arrivals” can help reduce emissions. Similar to JIT, with a virtual vessel arrival system, ships are notified of anticipated delays and align arrival times to berth availability. When a delay is expected, operators optimize their speed and routing against weather and ocean conditions, aiming to arrive when a berth is open. This, like JIT, reduces or eliminates wait times.
Though tricky to implement at scale, using a JIT and virtual arrival containerships can reduce fuel consumption and CO2 emissions by 14.16% per voyage. Even optimizing its speed over the final 12 or 24 hours could cut emissions by 4.23% ad 5.9%, respectively.
The challenge is implementing JIT and virtual arrivals with meaningful scale. When it comes to virtual arrivals, multiple parties are involved with each vessel’s arrival, and ships must agree to slow down as they approach the port in most cases. Again, with financial incentives often tied to early arrivals—and lengthy waits—promoting this approach may not land with vessel operators.
At the same time, there are a host of benefits to virtual arrivals. In addition to reduced fuel consumption in transit and anchorage, because there are fewer vessels in the port, there are also fewer collisions—and less budget spent on repairs and legal fees. There are also reduced demurrage fees thanks to shorter anchorage time and better dockside efficiency. Vessel operators may also save by reducing total voyage time by choosing later departure dates to avoid delays at their final port.
JIT arrivals have similar challenges. Ports utilizing a JIT approach must coordinate customs, tugs, pilots, stevedores, and more. Because each group works independently, JIT has had limited implementation globally.
Those ports that do implement JIT, though, are seeing significant improvements in carbon emissions. In several pilots surrounding both container and bulk terminals, idle time was reduced significantly. One pilot saw a 20% reduction in idle time on Shell vessel departures. Another reduced Maersk vessel idle time by 36%. Operational efficiency and asset utilization then skyrocket port-side while carbon emissions decline.
Future-Focused Measures to Solve Shipping’s Emissions Problem
In addition to IMO regulations and shifts in port efficiencies, several strategies can help curb emissions while ensuring vessels meet delivery mandates. Speed reductions and ship and engine designs that slow steaming could also contribute to decarbonization efforts. Reducing speed by just 10% across the global fleet would have a 23.3% impact on carbon emissions (based on 2010 numbers). Slowing some ships by just five knots—20%—could drive 50% cost savings on fuel while reducing carbon emissions, nitrogen oxides, black carbon, and nitrous oxide released into the environment.
Similarly, weather routing, fuel switching, and specialized hull coatings could help curb emissions.
The shipping industry is at a clear crossroad. Left unchecked, industry emissions are expected to grow to 130% of their 2008 levels over the next 25 years. While cost and speed to port will always be a concern, many organizations are leading the decarbonization charge. Maersk, for example, has set internal goals, aiming for net zero by 2040 and reducing emissions by half per container in the next seven years.
Ideally, other industry leaders and ports will follow suit, with an eye on tightening internal guidelines and adhering to IMO and local mandates. With this added commitment, shipping and supply chain companies can both contribute to long-term environmental well-being while, at the same time, finding and activating new strategies to boost speed, efficiency, and customer satisfaction.
Products that people sell mainly fall into two categories: “durable” or “consumable.” They’re pretty much exactly what they sound like. Consumable goods are made, shipped, and sold to be used and discarded or recycled within a short period of time—things like paper towels, disposable cups, scented candles, and other products that don’t last very long. Durable goods, on the other hand, are intended to last; TV sets, office furniture, laptops, kitchen appliances, and other products that don’t need to be replaced for years are all “durable.”
Last week, the Census Bureau released their Monthly Advance Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders (PDF link), and once again, durable goods are down across the board. New orders are down, shipment totals are down, and while existing inventories increased. That indicates wholesale and retail businesses are still having difficulties moving the product they have, and are decreasing new orders as a result. This report is similar to what we’ve seen in most recent months, mainly representing a continuing trend rather than a change in circumstances.
Why Is This Happening?
We know we’ve talked about this a lot recently, but Covid and government responses to it caused all sorts of market imbalances in ways that weren’t easily predictable. What we saw during the early days of Covid was unexpected by most.
First, there were lockdowns in many states—in some cases, we’ll call them “strong suggestions” that everyone stay home as much and for as long as possible. This was the “two weeks to flatten the curve” campaign that was extremely effective at convincing people to stay home. This resulted in tremendous numbers of employees switching directly to remote work in a very short time, a historic shift that still continues to this day.
Second, the US government responded with the largest spending bill in history. The part of that massive bill that most directly concerns this topic is the Paycheck Protection Program. This plan provided businesses with the opportunity to apply for extraordinarily cheap loans, which were surprisingly forgivable if the recipient of the loan followed the eligibility requirements—namely, that they continued to keep everyone on their payroll, maintain the same rates of pay, and that at least 60% of the loan be used to accomplish those two things. The long and short of it is that employees who otherwise would have been laid off or furloughed without pay for untold lengths of time kept drawing their same paychecks.
Then the final piece of the puzzle: stimulus checks were sent out. Everyone who met the eligibility requirements began receiving payments directly from the government. The first round went out quickly after the initial lockdowns started. Putting everything together, the typical American household had the following circumstances:
They were, for the most part, staying home and only venturing out for necessities;
They (thankfully) kept their jobs, with some exceptions, and still received the same paychecks they were accustomed to, though they were now usually working remotely;
They were suddenly given an unexpected windfall of thousands of dollars they hadn’t planned on receiving.
What you had here was a recipe for a spending spree unlike anything else we’ve seen in history. Stimulus checks aren’t anything new; the government has used them as a tool to add a little juice to a flagging economy before. However, they were typically sent out during times of high unemployment or particularly low consumer spending. This may have been the first time they were sent out to virtually every citizen before unemployment began rising, and on the heels of a previous spending spree.
Because we can’t forget what had happened right before the lockdowns: stores were stripped bare of all sorts of consumable goods. Paper towels, toilet paper, tissues, hand sanitizer, cleaning solutions, and all kinds of other basic necessities were nearly impossible to find in March/April of 2020. The rumors of a lockdown and fear of Covid drove people to panic buying everything they could get their hands on, partially because people were anticipating that they wouldn’t be able to casually head to the store for an unknown length of time.
So, to recap: you had an American middle class still mostly gainfully employed, with windfalls of cash, already overstocked on basic household necessities, and spending a lot of time at home. What do you get when you add these things together? Big ticket item shopping!
Yes, people started buying all sorts of durable goods during this period. Television, computers, game consoles, and furniture sales all increased. But probably the most surprising sales spike was for even more expensive items—Recreational Vehicles. That’s right; RV sales skyrocketed. It makes sense if you think about it: families knew they weren’t going to be going away on vacation for a while, so what’s left if you want to get away? Camping trips, of course. Combine the higher than usual amount of available cash with the fact that loans were extremely cheap at the time, and suddenly a luxury RV sounds a lot more feasible to the average family than it did in years past.
Unfortunately for businesses in these industries, these products last a very, very long time. How often do you replace your TV? Maybe once every five years? This early Covid spending spree compressed years of demand into a period of a few months. Now you have an American middle class that has just recently bought the TVs, RVs, computers, and furniture they wanted, and doesn’t need to replace most of it for another few years.
In short: because the middle class went on a shopping spree, they already bought most of the durable goods they wanted, and since they last for years, they aren’t replacing them quickly enough.
There is one other complication here: since the Federal Reserve raised the prime interest rate, loans are no longer as cheap as they were a couple of years ago. We went through close to a decade of very low (in some cases, borderline nonexistent) interest rates, and for Generation Z, those are the only interest rates they have life experience with. Now they’re spiking upward. That’s pumped the brakes on a lot of the higher-ticket products—like the RV industry, for example—and those sales are going to take some time before they bounce back.
Nobody knows what the future will hold, but this Census report is not full of good news for the next quarter. We expect this period of low sales to be mostly transitory; the pendulum will swing back eventually. What we don’t know is how long it will take. Until consumers renew their faith in the economy, we expect the current trend to hold. That said, uncertainty cannot last forever, and once people get the clarity they need on what’s coming, we expect this to turn around, and fast.
Until then, businesses should work with logistics partners who can help them get the most out of the products they do sell. You should focus on top-to-bottom efficiency within your existing supply chain, with the lowest possible shipping costs, removing unexpected warehousing fees, and handling last-mile delivery as easily as possible. Contact us to learn more about what we can do to help you.