Freight Cycling

Introduction

The fact that there is wave-like mechanism, in shipping rates is undeniable. This has led many thinkers to attempt an analysis to see if some method could lead to either ameliorating downturns or allowing investors and shipping companies and hence shipbuilders to schedule their work appropriately. Given that shipping rates are a symptom of and a contributor to the world economic cycle, with added influences of technological changes and political fluxes, then any formula cannot be even second or third order. In reality, even AI and ginormous data sets are unlikely to be able to take into account all the variables that contribute to the variations.

Opening Discussion

First of all, it is useful to understand that most formulae are approximations. Those we take as gospel such as Einstein’s e=mc² is an approximation – his 1905 paper says as much when it includes the telling phrase “neglecting quantities of the fourth and higher orders”. These quantities are minutely small, but they exist, and they have negligible effects except when dealing with vast amounts of mass or energy. Similarly, a formula for lesser problems such as predicting freight rates over the medium or long term must ignore small variables and jokers* (which are much more frequent than black swan events but much less unpredictable). Including the small variables and jokers would require so many caveats that any proposed prediction becomes useless.

There are several commercial forecasting services and quite a few academic forecast methods developed by PhD students involving chaos theory and AI. These can give good results, except when they do not. There are always unexpected financial, natural, or governmental phenomena to catch the unwary. This leads to situations like the great Nigerian concrete fiasco in the 1970s, the collapse of Sanko shipping of Japan in the 1980s, the period post-2008 financial collapse when international seaborne trade volumes contracted by 4.5% (excepting Chinese demand for iron and coal). As well as, Hanjin Shipping, Overseas Shipholding Group, Excel Maritime, and TMT Group, the Covid collapse, and the restructuring of the DOF group even more recently.

The international maritime freight trade is a chaotic mixture of capitalism and state intervention making outcomes quite unpredictable for long-term investment. Predicting freight rates with reasonable accuracy over the medium to long term would allow sensible budgeting for shipbuilding and shipyards to introduce a little elasticity into the supply chain.

At the other end of ocean freight voyages are the ports which are also inelastic.  Major shipping companies have been partially successful in leveraging ports into expansion and catering to their needs.  The offer of potential business has resulted in ports attempting to respond to demand, however, the drawback is that these alliances become hostage to the ports’ capacities. Indeed, the alliances themselves tend to be quite unstable so the politics involved would make a Byzantine amanuensis flinch.

The Current State of Play

The below graphic provides a snapshot of the different container shipping alliances over the last 27 years.

Over the last three decades, there have been thirteen or fourteen different compilations of carriers however at the start of 2023, there are three major alliances operating internationally: 2M, Ocean Alliance, and The Alliance. Then MSC and Maersk stated they were pulling out of the 2M alliance. One of the problems these larger companies have is their desire for the financial benefits of scale, resulting in the construction of the behemoth container ships (20,000 TEU+) which can only be unloaded at equipped ports and linger alongside far longer than their compact brothers. This has led to congestion problems around the world which leads to higher costs. For dry bulk, this year is proving more congested for offloading than last year which was significantly worse than in 2021. Liquid bulk congestion can vary depending on geographical location with Westcoast USA and Oceania faring badly.

Implementation of Just-In-Time arrival and offloading is desirable with ships varying their speed to achieve this, with the knock-on effect of fuel conservation and diminishing pollution emission. However, this has not been successfully rolled out industry-wide. The effect of all these measures has not shown to be significant on freight rates, which are currently at pre-Covid levels, but there is hope that costs to the owners and operators might be decreasing.

Smaller companies and the tramp trade will always be subject to the economic whimsies of international and national climate and smaller companies are the acorns from which tomorrow’s international oaks grow. In order to protect smaller owners and operators, they might form Guilds of Ronin Shippers and contract with land-based supply chains to compete. Who would organise such an association? Shipping agents would seem the most likely candidates.

So, can predicting freight rates in the short to medium term help companies weather jokers? Perhaps decoupling, or even partially insulating, from the world economic cycle might be possible. While larger shipping companies and agencies can take control of the supply chain from factory gate to retail outlet thus attempting to achieve sustainable logistics, this is only a third of the problem as the supply of ships is inelastic i.e., the capacity of shipyards is fairly fixed and port facilities can be upgraded only slowly.

Can We Do Better?

It would appear that all attempts to control or predict freight rates over the long-term are likely doomed to failure. We might predict that freight rates will remain low for a while before increasing, but that is no basis for financial investment. Would alliances between ports, alliances between shipyards, AI-developed route guidance, modular ship construction, and operation, or even, heaven forfend, standard rates stipulated for certain routes assist or are they even desirable? Perhaps for the end-user and owner/operator but possibly not so much for the risk-taker, the investor. This subject is compelling and will be further discussed in a following article.

*Jokers were mentioned in the previous article. These are untoward events that cause changes to the world economy

For more information on global shipping trends, connectivity and merchant freight predictions, please reach out to us at info@ValourConsultancy.com