Life ring tossed to outstretched hand in the water

Supply and Demand in 2017

By Roger Strevens

 

“Live horse and you’ll get grass” is an Irish expression which means “if you can just manage to survive for long enough, you’ll get the one thing you need to survive.” For many stakeholders in the industry, it sums up current market conditions.

In our reading of the tea leaves, overall breakbulk volumes will continue at relatively subdued levels in 2017. The oil and gas segment is not expected to see much improvement, although the Organization of Petroleum Exporting Countries’ recent agreement to cut production may change that.

In the mining segment, the Purchasing Manager’s Index is above 50, which, coupled with a favorable earnings outlook for the big players, suggests capital expenditure conditions are finally improving there. Other segments such as power generation equipment and rail rolling stock are expected to continue at more buoyant levels.

The supply side of the equation indicates excess capacity will continue for the foreseeable future. This is reinforced by the fact that breakbulk cargo can, to varying extents, be carried by four different vessel types (roll-on, roll-off; lift-on, lift-off; container and bulk carrier), each of which is dealing with its own overcapacity issues.

Reducing supply through early retirement of vessels is not an obvious choice either. On the one hand, the low steel rates from vessel recycling make scrapping a particularly unattractive option. But on the other it does have the benefit of being able to avoid costly new regulatory requirements for ballast water treatment systems and sulfur emissions.

For shippers, the demand and supply dynamics are highly favorable and some may even be hoping for further rate cuts. That may happen, but it would be prudent to also keep in mind that there is a point where good rates go bad, meaning that the risk of another Hanjin situation starts to increase as rates decrease.

One response to oversupply and the margin pressure it creates is to achieve savings through increased economy of scale, or, in a word, consolidation. Obviously, this is a trend that has already begun, but I believe it has not yet run its course. Large parts of the carrier and forwarder sides of the breakbulk logistics industry are highly fragmented; in short, there’s a lot of scope for further deals.

Risks abound in a consolidation phase, not least of which is that there can be loss of customer focus and hence a failure to meet their ever-evolving needs. One customer trend of note is the increasing number of original equipment manufacturers that are opting for a time-based, rather than project-based, liner contract. Many are finding the stable, flexible and industrialized liner option that ro-ro offers fits perfectly with their modern supply chain needs.

Finally, one last area to keep an eye on in 2017 is the digital developments at the industry’s periphery. The concept of digital disruption has been touted for quite some time now, but has had limited impact so far. It is tempting to view its proponents as creating new dot-com bubbles. However, a more measured approach is advisable. To quote Bill Gates: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.”

This industry is not inherently immune to digital disruption. As Gates continued: “Don’t let yourself be lulled into inaction.”

 

Roger Strevens is Vice President, Global Head of Key Accounts at Wallenius Wilhelmsen Logistics. Click here to go back to the intro page.

 

Lead photo via Shutterstock; edited by Catherine Dorrough.

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