Maritime transport: too cheap to be good
8 April 2016
Global shipping is – in a way – a unique success story. Maritime transport costs declined spectacularly over the last decades. This has facilitated an economic model of specialisation on a truly global scale. So much so that even David Ricardo, one of the intellectual fathers of economic globalisation, would have been surprised. Maritime transport represents only a tiny little share of the price of an average consumer good. It will cost you less than 300 US dollars to transport a container from Asia to Europe, but the goods in the container can easily represent a trade value of 300,000 dollars. Shipping is very cheap!
Too cheap to be good. The shipping sector is obsessed with costs. The survival of the cheapest – that is the idea. But that no longer works. Only a few companies make profits despite the very low oil prices, usually good news for shipping. Freight rates are at a record low, but that does not bring more cargo. So we are stuck. Shipping could get unstuck by creating more value for customers, increasing reliability and offering more bespoke service. Focus on revenue rather than costs. Be more expensive!
There is another reason why shipping is too cheap: the hidden costs that do not show up in the maritime freight rate. Hidden costs at many corners. Ships are too cheap because shipbuilding is subsidised. Buying ships is too cheap because shipping lines are often state-owned and benefit from sovereign risk ratings. Scrapping ships is too cheap because of scrapping subsidies. Shipping itself is too cheap because of state aid, favourable tax regimes, exemptions of social security contributions, government bail-outs and health care costs related to shipping emissions. Ports are too cheap because public authorities subsidise them via investments, tax exemptions and other cunning tricks.
Users should pay, but in most cases that does not happen. The reason is competition: between ports, between shipping nations, between shipbuilding nations. These ports and nations do not want to create their own competitive disadvantage by making users pay for all costs, risking that the competitor will not so the same. Competition is generally a great idea, but more so when there are common global rules for competition, when there is a level playing field.
So instead of the user, it is the taxpayer who pays. Is that good? No, because it leads to wasteful use of public money. No, because why subsidise one economic development model, the globalised economy, over another?
All this is amplified by the dominant paradigm in shipping: economies of scale. Bigger ships to save costs for shipping companies, and bigger costs for other transport actors to accommodate these ships. Shipping lines ask ports to dredge to 18 metres deep – to be paid with taxpayers’ money because the carrier might not come if the port makes him pay for these costs.
Is there a solution? Yes: less subsidies, more “user pays” and “polluter pays”. Time to apply this medicine to the shipping sector. How? Let’s save that for the next blogpost.
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6 Comments
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Tragedy of Commons becomes pertinent in balancing act. The balance between wasteful use of public money vis-a-vis user pays model in an overarching capitalist framework whereby profits are not necessarily shared or invested, equally or otherwise, presents an interesting paradigm. Succinct article and look forward to next one!
In the last 20 years, shipping cargos has been cheaper than handling operation ashore. There must be a hidden relation between shipping and terminal operation which will finally convey a solution for the unbalance of revenues. The mature phase of shipping has incremented volume while the growing phase of terminal operations has given rises to its own earnings. A rearrangement of shipping system has to occur, and the medicine proposed by Dr. Merk can obviously mix up the chessboard.
Well isnt that the argument here – shipping lines are the one gaining from Economies of scale, using a lot of different subsidies to build bigger ships. But in order to benefit from that huge investments are needed in the ports of call with dredging and bigger cranes – but the parcel size to the port remains the same. SHipowner are not willing to pay higher port fees they are pushed to the tax payer or towards short-sea shipping. Thus, at least in Europe, shippings economies of scales are hindering the organic growth of the much needed shortsea shipping and instead we get more Cargo on congested land infrastructure.
Good analysis of hidden subventions by different governments. But politic think different. The French government will not let close down the only remaining giant shipyard in St. Nazaire because of an agricultural region which would slip into deep depression. Consequently the shipbuilding get ‘help’ to finance new ships. Every country does it in a way or another to keep the industry at place. Not to forget the social dumping by employing cheap crews on board ships. There’s no solution because every emerging country will invest in shipbuilding or shipping.
Your observations are partially correct, but with some glaring exceptions. You seem to focus on government subsidies and in general terms they exist, but in relative terms they are almost all gone. That’s why there were 6 Japanese Lines and now 3; every South American country had it’s own fleet – gone; many European lines were subsidized – Italian Line, Nedlloyd, P&O, Hapag Lloyd (still is partially), French Line, original CMA-CGM not todays version; US Line, Lykes Line, PFEL, States Line, APL, AML, Waterman, Moore McCormick, Delta Line all US Flagged subsidized – gone. Remaining to a degree Japanese, Koreans, Taiwanese, Chinese.
So put that aside a second.
The issue of rate of return, or lack thereof, is not a new issue, see the list above all big carriers 40 years ago who are gone as well as Sea-Land Service, Seatrain, Dart Line, Barber Blue Sea, Johnson Scan Star and a few more.
The issue today is supply/demand ratios and marketing 101, and a lingering management philosophy that lowering ocean rates will increase the size of the market – it never has, never will. Yet they, the ocean carriers management continue to chase volume and market share at the expense of their bottom line. Some may hope that if enough of the competition goes out of business, the survivors will get smarter and better manage capacity, stabilize rates and become profitable again. In 2009 the carriers as an industry lost $22. Billion; in late 2009 and throughout 2010 the carriers removed over 650 vessels from the market, stabilized rates and then raised them, making $8.0 Billion i9n the process; a $30 Billion swing. They have never repeated it – removing the excess capacity. Why not? Good question, ask the senior management in Asia and Europe, Middle East
Dear Olaf,
Thanks for your time!
LINE 16 is everything, better service deserves better profit…in containers sea freights there is a paradox…still falling down dramatically.
Shippers take advantage of this disregarding the risks…it seems that some shipping lines do not have a freight strategy…in 24 hours a seafreight can fall $500 without shippers’s request…next theme for a new blog…thanks.