Need for Flexibility from Shippers and EPCs
By Felicity Landon
From general market trends to major global upheavals – engineering, procurement and construction companies and shippers have always had to monitor and anticipate developments and adjust their sourcing strategies accordingly. Continuing Covid-19 lockdowns, war in Ukraine and inflation are just some of the factors forcing shippers to rethink sourcing decisions in 2022. The need for extreme flexibility and responsiveness is obvious – and that’s before we even consider climate change and the drive for sustainable, eco-friendly policies.
The lockdown-induced rush for consumer goods, leading to container and capacity crunches, saw products moved out of containers and back to breakbulk, leading to other new pressures.
What now? “Some shippers have, over the past 12 to 18 months, definitely changed their strategies – hence the movement of some cargoes out of containers and into breakbulk stowage options,” said Susan Oatway, Drewry’s senior analyst for multipurpose and breakbulk shipping. “At the beginning of the capacity crunch, we also saw an increase in actual containers being shipped by MPV. The latter has almost returned to normal, we believe, but the so-called ‘spill-over’ cargoes are still in breakbulk – I would expect to see some of those returning to containerized mode over the next 12 months.”
The main change in all of this is the potential for near-sourcing, Oatway said: “We haven’t yet seen a big shift but we expect that it will be a trend next year – we are keeping an eye on the automatic identification system data.”
During Drewry’s recent multipurpose and heavy-lift shipping market outlook webinar, she said that having rebounded strongly over 2021, the growth in the MPV market share will slow this year and into 2023.
The “desperate search for space” that led to cargoes coming out of containers to MPV/breakbulk shipping has already begun to slow and will continue to do so into next year, she said.
“We expect period charter rates to continue to weaken into 2023 but we expect the rate of decline to slow. That is a function of the market share being eroded, increasing competition and capacity increasing.” Having said that, Drewry expected rates to remain above pre-pandemic levels “even as they are weakening.”
Considering the key risks to forecasts and outlook, Oatway noted: “There is little to any upside to our base case scenario. Any upside would rest on some fairly dramatic geopolitical events. Unfortunately, it is far easier to see downside likely impacts.”
Among these, she listed increasing inflationary and price worries and reduced consumer confidence, as well as a worsening global economic position – China lockdowns and conflict in Ukraine continuing.
However, she believes that the short-term is still positive for both carriers and shippers, especially thanks to better relationships between the two sides.
A Varied Response
Luke Mace, senior vice president – projects at GEODIS, noted that the priorities of customers that are seeking Geodis’s sourcing analysis and advice vary drastically. “For some right now it’s all about our sustainability program; for others, it’s guaranteed space allocations, while others prioritize contingency planning around seasonal weather,” he said. “Each project has its own unique requirements and the earlier you as the logistics provider can start working on a project, the better advice you can provide to the key stakeholders. It sounds very basic, but early engagement is probably the most important recipe for success.”
Mace said that a key change over the course of the past three years, which has impacted contract execution, has been how customers have managed their sourcing. “Up to three years ago, and for the majority of the past 15 years, supplier selection was essentially driven by pricing and the risks to execution were managed through contractual terms. However, events of the past three years have proved that contracts were not a fool-proof risk avoidance solution and that prices should only be one part of the equation,” he said.
“We now see customers focusing their sourcing strategy on capabilities, resiliency, agility and recovery capacity.”
GEODIS also sees customers being less aggressive in pushing the full extent of the risk and liability to the service provider/supplier and more open to price revisions options being inserted in contracts, Mace noted. “We seem to be walking back towards a more collaborative way on operating with a risk/reward sharing philosophy.”
Risks and uncertainties remain high for global supply chain operations, said the authors of a new report to the United Nations Conference on Trade and Development (UNCTAD) trade and development commission 13th session, scheduled for the end of November.
“Long-term trends to shorten supply chains and to diversify suppliers will have a bearing on global value chains and the geography of trade,” said the report. “In particular, trade over longer distances is expected to be negatively affected by rising transport costs, logistics disruptions and geopolitical frictions.”
Traders and policymakers will need to prepare for a future where shipping may be more costly and volatile than in the past, warned the UNCTAD authors. “The supply chain crisis and a number of other warning bells, such as the temporary closure of the Suez Canal and the war in Ukraine, combined with more volatility and less schedule reliability, call for shippers as well as governments to invest in the resilience of logistics operations.”
The shipping industry and its clients also have to prepare for the energy transition in maritime transport, which is necessary if the industry is to achieve its goal of significantly reducing greenhouse gas emissions, said the report, and this transition goes hand-in-hand with uncertainty about future fuels, vessel types and impacts on shipping services and networks.
Slow Speed Ahead
Drewry has been number-crunching regarding the impact of decarbonization and the International Maritime Organization’s new requirements on MPV fleet supply, Oatway said. Research including work with AIS and discussions with carriers has made clear that most of the vessels in the fleet are operating at well below their design speed, she said. “So only a small number will be affected by the new rules – ships that aren’t already operating below their design speeds. This sector is not a leader with regards to environmental technologies. A lot of the ships are still tramp; finding those [future] fuel sources is very difficult if you are going to a lot of different places.”
So rather than a rush for newbuilding MPVs and heavy-lift/project cargo vessels with new fuel options, she predicted “it is going to be slower speeds as opposed to demolition, in the first instance.”
Meanwhile, Drewry has noted a change in forward booking patterns in the MPV sector. “In summer 2021, carriers were booked six to nine months ahead and there was very little spot market activity. Now carriers are maybe six to eight weeks ahead, so the spot market has come back. Full capacity is definitely there, and that is one of the reasons the rates are falling, because there is capacity in the sector.”
The UNCTAD report said that long-term maritime logistics trends would take time to materialize. “Discussion is taking place on reshoring and near-shoring, yet there is so far little data-based evidence to indicate systemic changes in the arrangement of global production. On the contrary, the early success in the economies of East Asia in mitigating the economic effects of the pandemic may have resulted in increased reliance, in global value chains, on manufacturing production originating from East Asia.”
A recent study of the electronics and machinery sector also suggested that overall Asian supply chains remained little changed, albeit with a shift from China to other Asian countries as production costs in China are increasing, said the report.
Felicity Landon is an award-winning freelance journalist specializing in the ports, shipping, transport and logistics sectors.
Credit: Port of Aveiro