Topic 2 Logistics Strategy in Container Shipping

Time Frame Week 16 | 3 hours

Learning Outcome | At the end of this topic, you should be able to:
1. Explain the strategies being imposed by major container shipping lines with regard to
the provision of logistics and value-added activities.
Materials
Pen and Paper

Lesson 1 Usage of Engine room machineries during port stay

Pre-Test
Instructions: Read the question carefully. Write your answers in the ANSWER SHEET
provided.
1. Name at least 3 container shipping companies you are most familiar of.
2. What do you think are their strategies why they become a globally competitive shipping
company?

Vocabulary List
1. Containerization. A system of intermodal freight transport using intermodal containers
(also called shipping containers and ISO containers).
2. Flag State. The jurisdiction under whose laws the vessel is registered or licensed, and is
deemed the nationality of the vessel.
3. Warehousing. The practice or process of storing goods in a warehouse.

Acronyms
1. BAF. Bunker Adjustment Factor
2. Bn. Billion
3. EU. European Union
4. SSS. SkySailSystem
5. WSC. Winter Surcharge
6. WTO. World Transport Organization

Engagement Activity
Instructions. Follow tasks and answer the questions given. Write your answers on the
ANSWER SHEET provided.

1. Watch the video, “How Container Ports Work.mp4” located in your OTG Drive.
2. What insights and thoughts you’ve learned and understand in the video?

The contemporarily established model of global economy is based on the development of quality-
wise new, crucially important forms of economic relations with supply chains and networks.

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Global supply chains and networks integrate economically and spatially the centers of supply,
production, distribution and consumption within the global economy. It is happening through the
integration and optimization of all functions, processes and tasks performed by particular
components of the established vertical structures, i.e. purchase, transport, warehousing,
production, distribution, marketing, finances, returns, and the like. 2 Therefore, the global supply
networks and chains based on the logistics provide grounds for a new organization of business
activity, integrated entity-wise, functionally and spatially, conducted on a global scale, including
international trade and transport. At the same time, they rationalize the implementation of
economic processes, per costs and time, facilitating and supporting the economic development.
(Mangan et al., 2009)

Among numerous factors affecting the development of global supply chains and networks,
transport is crucially important since it determines the conditions, forms and effectiveness of
broadly understood physical processes regarding the transfer of goods, i.e. carriage, handling,
inventory, warehousing, etc. Within particular components of the global logistic supply chains,
they may constitute as much as 70-80% of all processes and related activities, making significant
contribution in creating the value chain, generated by this type of structure. (Pryke (ed.), 2009).
Therefore, this factor is perceived as particularly important in order to ensure efficient and
effective implementation of economic processes not only for flexible operations and development
of global supply chains but also for global economy at different stages of business cycle
development. (Chopra, Meindl, 2010 and Branch, 2009). At present, a significant role in this
respect is attached to the maritime transport, and especially its key segment, namely seaborne
container transport.

Maritime transport carries over 10.8 bn tonnes of cargo (2017), i.e. over 81% of the world trade
volume. (UNCTAD, 2018) It is predicted that between 2018 and 2023, the average annual rate of
growth of seaborne transport would amount to 3.8%. If this high rate of growth is sustained, then
in 2020 this transport will increase to 12.5-13.0 bn tonnes, and in 2030 it might exceed 16.5 bn
tonnes. (WSC, 2018 and Mandryk 2011). Whereas, per transport performance unit, the share of
maritime transport in the global trade services amounts to more than 92 % and is steadily
increasing because of the growing volume and average distance of carriage.

Maritime transport is also a dominant sector of transport in the global trade, if its share is
measured by the quantity of goods carried per value units. Excluding the EU internal trade, it is
estimated that nowadays its share in overall transport amounts to ca. 76 per cent. Whereas,
including the trade within EU member states, as an integral part of global trade, it is estimated
that at present the share of maritime transport in the world trade services based on export value
totals 59 per cent. (Grzelakowski, 2018)

Assuming, under WTO data from 2018, that the value of global freight export in 2017 amounted
to USD 17.73 bn, we can estimate that the value of maritime trade on a global scale reaching
nearly USD 11.0 bn. (WTO 2018). The value of seaborne transport, as defined above, has steadily
been increasing – faster than the volume of exported goods. As a result, it is assumed that in 2023,
maritime transport will carry goods worth at least USD 13.1 bn. $. Consequently, it means that
today the average value of one ton of seaborne cargo totals over USD 1,050 and within the last
decade the tendency has steadily been increasing (however, between 2014 and 2016, we
observed a significant decrease in this area).

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Apart from the increase in prices and changes in the assortment structure of global trade and
transportation, this tendency is significantly affected by the process of bulk-breaking and, first of
all, containerization. Since the tendency is increasing, which refers to the development of logistic
supply chains and networks demanding more rapid increase in the pace, timeliness and safety of
supplies, the percentage of high-value goods in maritime trade is steadily increasing; nowadays,
their share in global trade is estimated at min. 71 per cent of the value of global export, i.e. min.
USD 12.7 bn. ( UNCTAD, 2018) Assuming under the UNCTAD and WTO database that at present
17.1 per cent of the maritime transport volume and as much as 58 per cent of its value is
transported in containers on a global scale, it is estimated that in 2017 this mode of transport
carried goods worth USD 6.38 bn in more than 148 million TEU. (ICS, 2018) The value can also be
expressed with reference to the value of global production – its share totals USD 1 per each USD
15 of generated production. (GlobalInsight, 2016). It means that the average value of 1 ton of
seaborne cargo exported in containers amounts to ca. USD 4,100 and is 4.1 times higher than the
average unit value of cargo in maritime trade. (ICS, 2018)

Therefore, maritime transport ensures and creates, in the technical and operational as well as
economic and financial terms, adequate transport and logistics potential indispensable for further
undisturbed development of global trade, and consequently the increase in global economy.
Intermodal transport plays a vital role in this respect – containerization as the carrier of
globalization and leverage of global trade development as well as efficiency in the logistic supply
chains operations. It results from that fact that nowadays the average costs of container carriage
by sea constitute only 3-4 per cent of the value of cargo carried by this type of transport and the
cost of carrying 40” container with cargo at a distance of 1 nautical mile totals on average USD
0.10, which constitutes barely a fraction of costs of its carriage by road. As a result, on a global
scale, the share of global import transport handling costs has been decreasing for over 20 years.
Thus, between 2005 and 2017, the global trade volume was increasing on average by 3.8 per cent
annually, and its value by 7.9-8.1 per cent, whereas the shippers’ expenditure measured as per
freight paid, was increasing on average only within 50 per cent of this value. The value of
expenditure incurred by exporters and importers with regard to freight paid for the carriage of
goods by sea is estimated nowadays at ca. USD 798 bn, which constitutes ca. 4.5 per cent of the
global import in total and 6.7 per cent of the value of maritime transport goods determined per
import (Alphaliner, 2018)

Uncertainty and risk in the global container transport sector and their impact on freight markets
and logistics supply chains

Maritime transport, and in particular its container transport sector, belongs to these types of
business activity which operate under permanent uncertainty and risk. There are many reasons
for this; internal reasons which include e.g. the nature of environment where the transport is
performed, and external ones, including, first of all, regulatory and organizational market
conditions. However, primarily the aspect of uncertainty and risk related to business activity in
maritime shipping results from: (Grzelakowski, 2018)

- significant internationalization of the supply side of global freight container markets, featuring
very advanced process of separating the issue of ownership and control of the fleet by the flag
states from the issue of fleet registration (formal affiliation) and unification of the regulatory
mechanism of this shipping sector,

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- increasing concentration of capital and production in the sector of maritime transport, which is
reflected not only in establishing cartels and consortia, but also vertical forms of capital as well as
organization and trade relations within the global logistic supply chains (see Fig. 2),

- strong competitive pressure originating from significant openness and flexibility of freight market

Fig. 2 Existing level of integration and concentration of the global container market. Source UNCTAD

operations on a global scale – freedom to enter and leave the market, significant facilities
regarding acquisition and transfer of tonnage (charter, leasing, etc.); at the same time we can
observe constant pressure on the reduction of tonnage operating costs (rationalization), which,
with relatively high capital intensity of business activity in container shipping, high share of fixed
costs in the total ship handling costs and significant variability of income from the sale of basic
operation services, poses a risk of financial crisis for the shipping operators,

- need to provide prompt technical and organizational adjustments to the increasing systemic and
international requirements regarding: safety of shipping (requirements of IMO convention and
guidelines), ecological safety (sulphur directive, reduction of CO2 emission), as well as social safety
(ILO, ITF) and supply chain security (SCS), including protection of data against cyberattack, (ICS,
2018, ICS, 2014)

- lack of political and economic stability within the currently existing model of global economy,
which is reflected e.g. in: military conflicts, increasing protectionism, high threat of terrorism and
piracy, etc.

Fig. 3 The market of global maritime container – its development and dynamics in the years. Source
UNCTAD

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The element of uncertainty and risk related to business activity conducted in the container
maritime transport makes freight markets, where container operators render their services, very
dynamic. (see Fig. 3). Such kind of dynamics can be observed in significant fluctuations of the
volume and structure of effective and potential demand and potential supply.

The fluctuations can be observed in short, medium and long time periods. The amplitude of these
fluctuations in various time periods is diversified. The phenomenon and its scale are presented in
Fig. 4. In general, without going into the specifics of reasons and circumstances of the variability
of business activity intensity in the global container maritime transport, we can indicate that
nowadays apart from the reasons resulting from the nature of freight market, which operates like
the system of mass random services regarding the demand and supply, the main reason for its
dynamics (apart from random events – accidental or occasional), involves various recurrent

Fig. 4 Demand and supply dynamics of the global container market in the years 2007-2017

fluctuations. (Grzelakowski, 2012)

We can differ reinitiate the three main types with particular types of fluctuations. They include:

- seasonal cycles related to the seasonality of production, consumption or distribution noticeable

- business cycles, including, first of all, short-term inventory cycle (Kitchin), short-term investment
cycle (Juglar) and long-term Kuznetz and Kondratieff cycles,

- structural cycles of character and scope diversified in terms of time.

Each of these cycles exerts significant impact on the operations of container freight markets and
their dynamics. Moreover, the markets are subject to the impact of global logistics system, which
means that their mode of operation must be adapted to the requirements of global logistic supply
chains management strategy. It is, therefore, an additional sub-system regulating the maritime
container markets and another factor adding to its dynamics. Moreover, the markets operate in a
close vicinity of other types of markets, i.e. commodity, monetary and labour markets which affect
them significantly in subsequent cycles and stages of business cycle, maintaining its significant
dynamics.

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Strategies of global maritime container operators during imbalance and crisis on the freight
markets

Maritime transport, due to its relatively high level of energy intensity, which can be observed in
particular in the container shipping segment, strongly oriented to maintaining high standards of
logistics and logistic concepts of the supply chain management on a global scale, can sense in a
particular manner not only the results of market crisis – imbalance between the potential supply
and effective demand, but also all consequences of fuel crisis. The crisis is usually reflected in the
rapid increase in oil prices, which results in the increase in fuel, diesel oil and lubricants. They
enhance the total global tonnage operating costs to a difficult-to-accept level relative to the level of
income determined by variable level of freight and charter rates.

The container shipping fails to observe a clear positive correlation between the level of fuel prices
and the level of freight rates. The increase in bunker prices is not in line, as indicated by the results
of market analyses from the last fuel crisis of 2007/8, with the increase in freight rates [Benamara
et al. 2012]. It means that the mechanism of obtaining compensation for the increase in fuel prices
and consequently in the overall tonnage operating costs through the increased income obtained as
a result of growing freight rates in such situation in the maritime shipping, fails to operate. In such
circumstances the container carriers must look for other means and forms of solving the problem.
(WSC, 2018)

It is estimated that nowadays the bunker costs constitute on average over 40 per cent of total vessel
operating costs, and in the case of container ships they are higher by even 20 per cent.

Under the data of Germanischer Lloyd for an 8000 TEU vessel they amount to ca. 60 per cent of the
vessel operating costs. (Benamara et al., 2012). Therefore, in the case of significant increase in
bunker costs, e.g. on a scale observed between 2007 and 2008, the ship owners had to take
particular operational and tactical steps to meet the future operating challenges. Such actions
resulted from the adopted strategies defining possible response and behavior towards such crisis
and involved, since it was impossible to increase the freight rates, the following:

actions of short-term character,

- actions of medium- and long-term character.

The first ones, related mainly to the segment of liner shipping, involve in general:

- reduction in operational speed at all or some transport routes, namely the implementation of slow
steaming strategy,

- reorganization of services to decrease the vessel operating costs,

- introduction of BAF – Bunker Adjustment Factor,

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- tie-up of tonnage, as a form of temporary withdrawal from operation due to inability to cover high
operating costs. (Robinson, 2005)

The reduction in vessel speed leads to lower fuel consumption. In the container shipping segment,
the reduction in vessel speed by 10 per cent reduces fuel consumption on average by ca. 25 per
cent. (ICS, 2014) The result in the operating costs in such situation is significant and many operators
choose such solution to survive during fuel crisis. However, it includes numerous drawbacks which
in many cases make such approach even harmful for the ship owner due to the scale of indirect
costs and economic and financial effects. Since the said strategy results in: 1/ not only prolonged
time of voyage (travel) and consequently decrease in the number of performed production cycles
of each vessel per year, and therefore, reduction in income from the sale of transport services, but
also 2/ generation of additional often very high indirect costs resulting from the prolonged time of
freezing the capital blocked in goods carried by sea and the increase in other logistic costs in the
entire global land-maritime supply chain. (Grzelakowski, 2016)

These costs resulting from the implementation of slow steaming strategy include also the costs
which indirectly arise from excessive absorption of fixed capital by shipping operators, including
mainly returned empties – mainly the containers. Their operating cycle in such conditions
significantly extends the traditionally defined standards in this area. As a result – depending on the
intensity of operational slow-down, where containers are transformed from unitized packaging to
warehouses – there is significant growing demand for warehouses in the centers of production,
distribution and consumption, which may lead – as it was observed during the latest crisis – to
exhausting the reserves and lack of containers necessary for loading the goods. (UNCTAD, 2018 and
ICS, 2018) The phenomenon generates not only additional transport and logistic costs, but also
strong conflicts between the maritime carriers and shippers, which destabilize to some extent the
existing forms of cooperation. The results of crisis situations occurring in one component of the
supply chain transfer usually very quickly to other components distorting their operations and
leading to onerous disruptions in the global supply chain.

The disruptions also occur when carriers, due to the increase in bunker prices, as it is happening
these days (see Fig. 5), introduce bunker surcharges (BAF) which increase the costs of maritime
transport, sometimes significantly and – bearing in mind their best interests – reorganize the
services. In both cases, these actions are always underpinned by the transfer of some costs
generated by the fuel crisis to the consumers of transport services. If one of these short- and
medium-term strategies fails to bring the intended result, ship owners frequently try to apply also
another, additional strategy from a wide range of possible solutions which strengthens (synergy)
the basic strategy.

Fig. 5 Bunker fuel prices and bunker price index in the recent two years

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Being aware of possible long-term tendency regarding fuel price increase and consequently the
increase in tonnage operating costs, ship owners look for other solutions related to their medium-
and long-term development strategies including such crisis situations. They include:

- restructuring of tonnage which leads to the purchase of new, less energy-intensive vessels,
adjusted to the requirements of carriage routes,

- introduction of new, usually hybrid drive systems e.g. with elements of sail – SSS system
(SKYSAILSystem) which made it possible on some routes to reduce the consumption of fuel even up
to 50 per cent, which translated into the possibility to reduce fuel costs by 20 per cent,

- search for new carriage routes, in particular within ocean lines, allowing significant reduction of
transport distance, time and costs,

- seasonal removal of vessels from operation (tied-up tonnage) with the intention to sell them on
the second-hand markets.

The presented shipping operators’ strategies during fuel crisis are to a great extent complementary
in their nature. However, the selection of a given strategy is rather difficult. It is conditional upon
numerous factors dependent not only on the intensity of crisis and forecasts regarding the
development of crisis situation, but also on the standing of a given ship owner on the commodity
and freight markets. However, it is proven that mainly the standing on the market as well as
competitive advantage are the fundamental elements which determine the ship owners’ behavior
during crisis and the selection of relevant strategy.

Discussion

As a result of definitely lower than expected at the beginning of this decade growth rate of global
effective demand for the services of maritime container operators and its significant fluctuations of
seasonal and recurrent character, occurring when the container carriers seem unable to adapt
(necessary reduction) the tonnage to these changes, this segment of global freight market has been
in the state of creeping crisis since 2011. The crisis covers also other components of global logistic
supply chains, destabilizing the relations existing in this sector.

The adjustment strategies of global container owners, implemented in the conditions of significant
market imbalance are expressed mainly in the need to reduce unit costs of tonnage handling and
the cost of carrying 1 TEU. The achievement of this goal involves: 1. introduction of mega container
ships into operation (VLCC), 2. optimization of liner services by limiting their number, 3. limiting
competition through actions leading to horizontal and vertical integration (mergers and
acquisitions, establishing alliances, etc.), 4. expanding the scale of production and its diversification
to minimize the threat of bankruptcy (capital engagement in other components of the supply chain).
These actions lead to changing the business model of global container operators. The change is

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expressed in gradual departure from the confrontational model (model of total competition)
towards a model based on cooperation within the formula of shipping alliance.

The strategies generate particular results for each component of the global supply chain where the
container operators render their services. For ship operators they are expressed in: I. 1/ reduction
of many components of operating costs – the result of cooperation and concentration of activities
within alliances, 2. better adaptation of carrier, in the operational and financial aspect, to significant
demand fluctuations on a given carriage route (decrease in competitive pressure and the related
increase in nett income (Ebidta); as a result of such actions Maersk, COSCO and Hapag Lloyd
recorded financial surplus in 2018. II. access of leading global container operators – Hapag Lloyd,
CMA CGM, MOL and OOCL to NYSHEX Exchange (New York Shipping Exchange). The Exchange is
famous for promoting digital forwarding contracts for the global container transport. Therefore, the
solution promotes the largest forwarding companies. Thanks to the Exchange (NYSHEX), subsequent
rounds of financing the ship owners’ investments can be performed, and entering the Exchange in
2017 by two large ship owners, i.e. German Hapag-Lloyd and French CMA CGM, together with GE
Ventures and Goldman Sachs funds additionally increased the opportunities to acquire financial
resources for the development of maritime fleet. The effects for shippers and forwarders are
perceived in a different light. Very fragmented market of shippers and forwarders is observing these
changes with significant concern (growing concentration in the segment of container transport and
unprecedented growth of market power of this component of supply chain), and are anxious about
strong dictate of carriers and further reduction of the area of their operation, as well as possible
reduction in the quality of services and lack of predictability of ship owners’ behavior within
alliances.

However, at the same time this component of supply chain can observe certain advantages: 1.
contracting within alliances and not with one carrier only, which gives possibilities of better risk
management (better market transparency), 2. alliances provide access to geographically larger
logistic space than the one offered by individual operator, 3. there is a greater possibility to organize
subsequent shipments through the carrier since access to other vessels within a given alliance is
ensured.

The effects for ports and maritime terminals are perceived from the perspective of threats. The
uncertainty and risk is increasing due to possible elimination of selected unattractive, from the
perspective of alliance network of connections, container terminals and the concentration of ship
services in mega hubs (such as Zebrugge and Antwerp, declining importance of Algeciras, etc.).
There is growing pressure on further port facilities regarding handling the alliance vessels and
increase in handling capacity (ranking of ports and terminals), which refers to necessary increase in
capital expenditure and search for new transport and logistic solutions (e.g. GRID Logistics). There
is also possibility to prefer „own” ship owner’s container terminal at the expense of other terminals,
which may increase competition in this component of supply chain on a regional scale, leading to
lower effectiveness of handling commodity flows in the global supply chain. The effects for economy
and market regulators shall be perceived from numerous perspectives. On the one hand, the
activities of global container operators lead to the reduction of seaborne carriage costs and
consequently the logistic costs within the supply chains. It brings significant effects for the exporters
and importers and final consumers of goods carried by sea. Moreover, the decline in maritime
transport costs in the final prices of goods provides stimulus for the development of global trade
and support of globalization processes and consequently, greater openness of markets. These

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activities also lead to the decrease in transport-intensity on a global scale, which results from
rationalization of carriage in this segment of freight market. On the other hand, we can observe
growing anxiety of countries, international organizations and freight market regulators (DG
Competition and FMC) regarding the results of further concentration and elimination of competition
(alliance is still a tolerated form of shipping cartel created by the post-conference era in regular
shipping).

In conclusion, we can state that container alliances by preferring the consolidation of the shipping
sector force changes not only in the previous model of container transport market operations, but
also in the global supply chain. It refers to its particular components. The role of carrier is
strengthened on an unparalleled scale compared to other entities. As a result, the carrier becomes
a strong logistic operator market- and capital-wise. Consequently, we can observe the integration
of markets and supply chains previously operating individually. We can also observe „slimming
down” of processes and operations as well as reduction of entities involved in the implementation
of activities and objectives of the global logistic supply chain. However, it intensifies the
concentration within the logistic chain, reducing the role of other components, in particular
forwarders and land operators to the position of subcontractors performing the tasks of alliance or
strong container operator.

Such actions provide grounds for introducing innovative solutions in the sector of maritime logistics
based on unified standard defined by regulators and shipping operators. The market behavior of
container owners resulting from their strategy also strengthen the position of large global logistic
operators, increasingly marginalizing the small and medium operators, which increase the
competition in this segment of global logistic market.

Source
1. Andrzej Grzelakowski. Gdynia Maritime University. Research Gate.
https://www.researchgate.net/publication/335490789_GLOBAL_CONTAINER_SHIPPING_
OPERATORS'_STRATEGIES_AND_THEIR_IMPACT_ON_LOGISTICS_SUPPLY_CHAINS

Further Reading
1. Hercules E. Haralambides. Maritime Economics and Logistics. Gigantism in Container
Shipping, Ports and Global Logistics: A Time-Lapse into the Future. January 7, 2019.
https://link.springer.com/article/10.1057/s41278-018-00116-0

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