Home » Factors Impacting Ocean Shipping Companies: A Comprehensive Analysis

Factors Impacting Ocean Shipping Companies: A Comprehensive Analysis

by | Aug 15, 2023 | Blog Post

With up to 90% of the world’s goods being transported by sea, the shipping industry plays a vital role in global trade.

However, the coming years pose unprecedented operational challenges for large ocean shipping companies responsible for transporting this vast freight. How these industry giants respond to these challenges will have far-reaching implications for every global trader’s shipping strategy and ultimately impact their bottom line.

Let’s examine what the coming years have in store for vessel operators and how that might impact shippers.

The Supply-Demand Interaction in the Shipping Market

Currently, the shipping industry faces a significant challenge arising from an oversupply of container vessels. Over the past years, ocean shipping companies have witnessed a surge in profitability, resulting in an excess of new ship orders.

As of June 2023, there are approximately 5,781 container vessels, representing a total capacity of about 26.62 million TEUs worldwide. Notably, 913 new vessel orders, accounting for around 7.6 million TEUs, have been placed, representing 28.5% of the existing global capacity.

This surge in supply can be attributed to several factors.

  • Forming alliances and vessel-sharing agreements allow ocean shipping companies to optimize resources, improve efficiency, and offer global coverage to customers.
  • Compliance with IMO’s zero-carbon emission policies drives investment in newer, eco-friendly vessels running on alternative fuels like LNG and methanol.
  • The expansion of the Panama and Suez Canals in 2016 and 2015, respectively revolutionized global trade, allowing larger vessels and reducing costs for ocean shipping companies.
  • Internal operational needs and port expansions contribute to the increased supply of container vessels as ocean shipping companies strive for optimization and efficiency.

The delivery of new ships is projected to be concentrated between 2023 and 2025, leading to one of the highest three-year periods of new deliveries in history. This increase in supply may pose challenges for ocean shipping companies as they navigate the market dynamics.

Excess Slot Capacity in the Shipping Market

The surplus of container vessels poses a critical challenge for the ocean shipping industry. With the surge in new ship orders and increased vessel capacity, ocean shipping companies must adopt effective strategies to manage excess slot capacity and maintain market stability.

As we know, when there is a surplus of container vessels and not enough cargo to fill those vessels, it can lead to several challenges for ocean shipping companies. To address this issue, shipping companies must adopt effective strategies to optimize capacity utilization, such as:

  • Arranging Lay-Up or Dry Docking: Temporarily laying-up or dry-docking vessels allows companies to address oversupply.
  • Postponing Deliveries of New Shipbuilding Orders: Companies may delay the delivery of new vessels to avoid exacerbating the oversupply situation.
  • Slow Steaming and Increasing Vessels on the Route: Slowing down vessel speeds and increasing the number of vessels on a route can help manage excess capacity.
  • Modifying Routes to the Cape of Good Hope: By diverting routes to the Cape of Good Hope in Africa, ocean shipping companies can save on canal fees and add more vessels to the routes.
  • Demolishing Older Vessels or Retiring Non-Effective Vessels: Evaluating and retiring older vessels that may not be cost-effective or compliant with emission reduction policies may offer a solution to manage excess capacity.

The Impact of Europe and the United States Antitrust Laws in the Shipping Industry

Concerns have intensified in recent years regarding some container shipping companies’ market dominance and control. As a result, both Europe and the United States have proposed laws to address antitrust concerns in the shipping industry.

The United States, a key player in global trade, took significant strides in reforming its shipping regulations, culminating in the Ocean Shipping Reform Act of 2022. This critical statute gives the Federal Maritime Commission (FMC) expanded regulatory authority, allowing for direct investigations into carrier charges. The main objective of this act is to correct the unfair treatment and charges imposed by foreign shipping companies on US importers and exporters. Furthermore, the Ocean Shipping Antitrust Enforcement Act proposes the repeal of antitrust immunity for ocean shipping companies and a reevaluation of the limitations put on alliances and Vessel Sharing Agreements (VSA).

Similarly, the European Union is set to decide on the continuation or adjustment of alliances and VSA before April 25, 2024. Although the World Shipping Council advocates that the current Block Exemption Regulation (BER) fosters operational efficiency for shipping companies, contrasting arguments have emerged, suggesting that certain alliances capitalized on capacity shortages and freight rate surges during the pandemic, resulting in a significant market backlash.

As the maritime industry braces for potential changes to antitrust laws in Europe and the United States, the implications for ocean shipping companies worldwide are far-reaching. Future performance and strategic decisions, particularly concerning alliance restructuring, are likely to be significantly impacted by the evolving regulatory landscape.

IMO Net-Zero Carbon Emissions Policy

In the wake of heightened environmental consciousness, concerns surrounding carbon emissions have become a driving force in the ocean shipping companies’ evolution. In 2018, the International Maritime Organization (IMO) took a decisive step by approving a greenhouse gas strategy aimed at reducing carbon emissions by 40% before the end of 2030 and an ambitious 70% by the end of 2050.

To accomplish these ambitious objectives, the IMO mandated that all global vessels complete carbon emissions reporting by 2023. Additionally, beginning in 2024, vessels will be subject to the Carbon Intensity Indicator (CII) rating system. Vessels assessed as underperforming (D or E) for three consecutive years or obtaining an E rating in a single year will be required to submit remedial action plans under this system. Slow steaming or vessel retirement may be included in these designs.

In light of these stringent environmental requirements, alternative fuels such as LNG and methanol have grown in popularity, with dual-fuel vessels accounting for more than 40% of new shipbuilding orders. Notable industry titans like as Maersk and CMA CGM have taken preemptive measures such as ordering methanol dual-fuel vessels and building future methanol supply and infrastructure.

Cargo Movements are Shifting to New Production Hubs

In recent years, supply chains have been witnessing a significant shift from centralization to decentralization, fueled by the “China Plus One” strategy. This change is primarily driven by manufacturers who are gradually moving their operations from traditional manufacturing hubs, like China, to Southeast Asian countries. The US-China trade war, the Covid-19 pandemic, and geopolitical tensions have accelerated this trend, as companies seek to diversify their production and sourcing locations for better risk management and operational resilience.

Southeast Asian countries, including India, Vietnam, and Thailand, have emerged as attractive destinations for manufacturers embracing the “China Plus One” approach. These regions offer lower labor costs, skilled workforces, and substantial diaspora communities, making them increasingly favored locations for companies seeking supply chain diversity.

India, in particular, stands out with its large population, fast GDP growth, and proactive measures to attract foreign direct investment via ambitious infrastructure projects.  In today’s dynamic global trade scene, these emerging regions are increasingly favored locations for companies seeking supply chain diversity.

In response to this shift in manufacturing bases, ocean shipping companies are also adapting their strategies––they are modifying vessel routes, adding more stops, and utilizing smaller vessels, to accommodate the changing demand patterns in Southeast Asia.

Obviously, ocean shipping companies with well-established setups that serve India and ASEAN countries will benefit, and those who are less established may shift focus to the region.

Negotiation Results at US West Coast Ports

Ocean shipping companies have also been impacted by labor negotiations on the US West Coast between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA). While an agreement was reached in June 2023, the threat of a strike forced US importers to look for alternate ports on the East and Gulf Coasts. Some of that volume may not shift back and carriers have been forced to reevaluate how they allocate capacity.

The Impact of the Russia-Ukraine War

The ongoing Russia-Ukraine war has far-reaching implications for the shipping industry. According to the World Bank, Ukraine’s post-war reconstruction needs have risen to a staggering $411 billion and the process is expected to take at least 10 years. Should the conflict eventually reach a resolution, the shipping industry is poised to witness a surge in demand as equipment and supplies pour into the country.  This surge is expected to primarily benefit the Mediterranean and Black Sea routes to Ukraine, as the nation begins its journey towards recovery and development.

Furthermore, the eventual restoration of spending power in Europe will likely have a profound impact on the shipping industry. The resurgence of consumer spending in the European market will drive an increase in commerce and cargo volumes, stimulating trade and fostering economic growth.

Ocean Shipping Company Success Will Require Agility All Around

We normally don’t associate the word “agility” with 220,000-ton loaded ocean vessels––or the huge companies that operate them. However, in the face of the challenges ahead in ocean shipping, agility will be the defining factor for success. Both steamship lines and BCOs (Beneficial Cargo Owners) will need to adeptly navigate the complexities of the industry, swiftly adapting to secure the right capacity at the most favorable prices.

As the shipping landscape continues to evolve, having an agile logistics partner like Dimerco Express Group becomes indispensable, particularly for freight moving to, from, or within the Asia-Pacific region. As a global NVOCC, Dimerco provides comprehensive FCL and LCL services, along with air freight and contract logistics services, and is ready to provide the flexibility and expertise needed for a successful shipping experience. Get in touch with a Dimerco global shipping specialist today to discuss your shipping requirements.