What's up with Maersk, MSC, CMA CGM moving into air cargo? Could it be an early sign of more mergers?
 The one thought left after noting four major carriers moving into air freight was that if great minds were thinking alike, then there must be more to it than meets the eye.
Much of reasoning appears to hinge on this year's UN's environmental CO2 emission regulations, it was revealed in an article in Harvard Business Review.
"The impact on container shipping, the backbone of the global merchandise trade, will be substantial. A significant number of ships will not be compliant," it said. Most of these are older, smaller ships with less than 8,000 TEU capacity." Thus, perfectly good ships will be scrapped by regulators and their owners will likely be driven out of business.
In light of this, the heaviest of the heavy hitters, far from fighting such brief creep, embraced new restrictive regulations, even doubling down on emergency measures. This was forgivable to meet the exigencies of the Covid scare - when it was on - but not when it was over. The CO2 scare seems equally bogus.
One could hardly credit bureaucratic attempts to keep the Covid crisis alive now that it became clear that there was little difference in death rates between jurisdictions that did much and those that did little in response to Covid. It was over. People had had enough of vaccinations that did not vaccinate, but needed re-vaccinations called boosters.
Yet major liners were moving into air freight. Why? Perhaps because there were tell-tale warnings that the bureaucratic Elders of Davos were on the move again enacting measures targeting shipping that would serve the big fish and crush the small fry in the name of environmentalism. CO2 emissions had become the current craze.
Just as clogged supply chains became unclogged, scores of ships were no longer awaiting berths at anchor, but were being handled again in the pre-Covid manner. Freight train bunch-ups in railyards and truck depots were a thing of the past.
But rather than a "new normal" being imposed as many expected, an "old normal" of low freight rates had returned as retailers reported inventory overstocking at warehouses that was the real outcome of the needless two-year shipping panic.
Not surprisingly, Christmas came early to the door-to-door air cargo world as panicky forwarders found themselves paying premium prices to get consignments through the congested supply chains to their most valued customers. Hawaii's Matson shipping line even devised a pricey ocean-going transpacific hook-or-by-crook service towards the end of the panic.
But when it became clear that the "good times" were coming to an end, Matson shut down its premium service, even contradicting its prediction that it would continue longer than it did.
So why were Maersk, Mediterranean Shipping Co (MSC), CMA CGM and Cosco branching away from its traditional port-to-port role and taking the plunge into the door-to-door territory of the forwarder and 3PL?
Curiouser and curiouser, said Alice . . .
That was until one discovered in Harvard Business Review what the bureaucratic mind had cooked up since. In the name of environmentalism, the international bureaucracy has devised a regulatory world in which only the biggest shipping lines could afford. Unhealthy corporate concentration was usually policed by the appearance of leaner and meaner smaller rivals. One thinks of tiny Apple challenging the might of IBM. The shipping industry itself is replete with tales of how the mighty have fallen and innovative new practices outpaced and eclipsed great names like Cunard and P&O Line, consigning them to the dustbin of history.
But that has become difficult to imagine in today's of safety first and always, where the regulatory world rules so much. This is effected by making obedience to the rules so expensive that only the rich can afford to be compliant, making it impossible for lesser beings to stay in business, much less challenge the giants of the industry as they could in the past.
Jeremy Nixon, the CEO of Ocean Network Express (ONE), the union of Japan's "big three", MOL, NYK and "K" Line, estimates that the global container shipping industry will have to invest US$1.5 trillion over the next 20 to 30 years to meet United Nations targets, which through its International Maritime Organisation (IMO), is increasingly ruling the roost.
There is a bias built into the UN rule book that favours the large operators. Because the carbon-intensity measure is tied to how much weight is moved per unit of distance, larger vessels sailing long routes with fewer port calls will earn higher grades than smaller ships making many. Newer and larger ships, even if not completely full, will score better than smaller ones. The rules would affect ships as small at 5,000 deadweight tons. In terms TEU that's 250 TEU, when ships today can run up to and beyond 24,000 TEU.
The IMO rules will favour efficiency, said Harvard Business Review: "larger ships, fewer port calls, and less-frequent service with maximum capacity utilisation per ship. Companies that export to Europe or have European suppliers should plan for the higher costs imposed by the Carbon Border Adjustment Mechanism and the EU Emissions Trading Scheme".
Advised Harvard Business Review: "Managers should anticipate that other countries outside the EU will take similar actions. For example, US managers should pay attention to Canada, which has set a large increase in carbon pricing for 2030. There may be pressure for similar border adjustment measures in heavy greenhouse gas emitting industries such as steel.
Lower-volume trade lanes will likely see less-frequent and higher-cost services. This was foreshadowed during the height of the supply chain crisis in 2021, when Japan lost some direct eastbound services to North America as container lines tried to juggle capacity shortages and delays by dropping port calls from their rotations.
The annual efficiency ratio (AER) is used to grade the ship A, B, C, D, or E. Under the rules, vessels that receive a grade of A, B, or C will be deemed compliant that year. Vessels graded D have a three-year grace period during which the owner will have to somehow get back into compliance, and those graded E will have one year to do so.
The grading criteria will become tougher every year: The IMO is mandating a two per cent annual improvement in AER from 2023 through 2030. Thus, a ship may start with a B grade in 2023, but if no changes are made after as few as six years, it could automatically become a D. If the owner cannot comply, the vessel will have to be removed from service and scrapped.
If smaller shipping lines are out of the liner space by dint of an impossible regulatory environment, their next move might well be to occupy the NVOCC space. To forestall this development, it might be advisable for surviving ocean carriers to take go whole hog into D2D - door-to-door delivery.
The far sighted among them may well anticipate that triumphant no-growth environmentalists, increasingly dependent on printing money, spawning inflation will effect a return to a very old normal - about 1965 - when only the affluent could afford imports.
An early move in that direction may well be major ocean carriers using their vastly superior financial clout to make P2P incidental to D2D. Just saying . . . |
