Podcast Summary
Reflecting on the supply chain crisis and considering changes: Principal Asset Management seeks best investing opportunities amid easing supply chain crisis. Supply chain industry faces excess capacity as prices drop for ships and planes. Importance of empathy and awareness towards invisible struggles. Industry reflects on lessons learned and potential permanent changes.
The supply chain crisis, while not completely over, is easing, allowing us to reflect on what we've learned and consider potential changes. Principal Asset Management, with their global perspective and local insights, are actively seeking the best investing opportunities. Meanwhile, in other news, the supply chain industry, which has been cyclical, is now facing excess capacity as prices have dropped for ships and planes, a problem that was previously unheard of due to the rapid cycling of the crisis. The podcast "The Visibility Gap" emphasizes the importance of empathy and awareness towards invisible struggles, making workplaces and companies healthier. In the world of shipping and logistics, the industry is reflecting on the lessons learned from the pandemic and considering whether to return to the 2019 business pattern or make permanent changes. The ongoing geopolitical tensions and energy cost surge in Europe add to the complexity of the situation. Join the conversation on Odd Lots as they continue to explore these topics with industry experts.
Profits in the shipping industry leading to new investments and returns to shareholders: Despite high profits, the shipping industry may face oversupply and plunging prices due to potential macro factors like geopolitical tensions and energy costs. Companies must reevaluate their strategies accordingly.
The shipping industry has experienced unprecedented profits in the last few years due to high demand and supply chain disruptions. Companies have used this windfall to invest in new assets, expand their businesses, and return cash to shareholders. However, the industry is now facing a potential oversupply of ships and planes, which could lead to plunging prices and a shift in market conditions. Other macro factors, such as the ongoing war in Ukraine, tensions between China and the US, and surging energy costs in Europe, are also causing uncertainty and forcing businesses to reevaluate their long-term strategies. These trends, driven by labor costs in China and exacerbated by geopolitical tensions and the pandemic, are likely to continue shaping the industry in the coming years.
Impact of long-term contracts on freight shipping during labor shortages: 60-70% of containerized freight moves under annual contracts, and these contracts often persist even during spot rate fluctuations, delaying the financial impact on carriers.
While labor availability is a significant factor in manufacturing jobs, the ecosystem surrounding industries like consumer electronics in Shenzhen makes it difficult to relocate factories. The importance of long-term contracts in freight shipping also means that spot rate fluctuations may not immediately impact the financial statements of carriers. Approximately 60-70% of containerized freight moves under annual contracts, and these contracts are often honored even when spot rates drop below the agreed-upon price. Contract renewal season for ocean freight in the United States is approaching, and carriers will look to spot markets to determine the settlement price. The pain for carriers is likely to come after the contract renewal season. This economic theory in practice is an interesting one to watch unfold.
Maintaining good relationships with major ocean carriers is crucial for securing space and consistent freight movement in the container shipping industry.: Building strong relationships with major ocean carriers through profitability, consistency, and long-term commitment can help secure space and ensure freight movement in the container shipping industry, especially during times of capacity constraints.
In the container shipping industry, relationships matter, especially during times of capacity constraints. With only a handful of major ocean carriers controlling the majority of the market, maintaining good relationships with them can make a significant difference in securing space and ensuring consistent freight movement. These relationships are built on factors such as profitability, consistency, and long-term commitment. The industry has seen a shift towards more relationship-driven business in recent years, particularly during periods of tight capacity. However, when excess capacity is available, the importance of relationships may decrease. Additionally, the container shipping market has experienced significant fluctuations in recent years, going from a surplus to extreme scarcity and back to a surplus, with the current state being characterized by both a lack of capacity and poor demand. Another intriguing aspect is the impact of energy prices on manufacturing costs, with Europe and the US facing significant differences due to varying electricity prices.
Slow progress in shipping industry efficiency: Shippers prioritize cargo loading over optimization, port infrastructure lags, and labor negotiations hinder automation efforts, making it difficult to predict how the industry will adapt to future disruptions
Despite the potential for increased efficiency in the shipping industry, such as filling container ships, optimizing container usage, and improving port infrastructure, progress has been slow. It seems that when space on a ship is scarce, shippers prioritize getting their cargo on board over optimizing the use of that space. Furthermore, port infrastructure and technology have not significantly improved, and ongoing labor negotiations may hinder automation efforts. My visit to Long Beach Port led to some improvements in container stacking, but overall, the situation remains the same. The complexities and challenges of implementing these efficiency measures make it difficult to predict how the industry will adapt to future supply chain disruptions.
Inefficiencies at US Ports: Zoning, Equipment, and Labor: Zoning laws, lack of trailers and chassis, outdated appointment system, unionized workforce, and adversarial relationship between management and labor are causing significant inefficiencies at US ports. Systemic changes are needed to improve efficiency.
The backlog of containers at the ports of Long Beach and Los Angeles is due to a combination of factors, including zoning laws limiting container stacking height, a lack of trailers and chassis, and an outdated appointment system for truckers. A quick response from the city of Long Beach to change the zoning law had a marginal impact, but more systemic changes are needed to improve efficiency. The unionized workforce and the adversarial relationship between management and labor also contribute to inefficiencies, making it difficult for companies to retain a consistent workforce and provide adequate training. The cost of this level of unionization from an economic perspective is unclear, as it's intertwined with other factors, such as management style and automation levels. However, the inefficiencies caused by the current structure at US ports are significant and require attention from all stakeholders to address.
Decades of automation in Rotterdam ports: Automation in ports leads to cost savings and improved efficiency, but container shippers may face challenges and respond with consolidation.
Automation in ports, while facing criticism, can lead to significant cost savings for operators. This is evident in the example of Rotterdam, which has been fully automated for decades with self-driving trucks. The workers in these ports are well-compensated, and automation is important for continuing to improve the efficiency of global shipping, which has been a major driver of economic growth and poverty reduction. However, container shippers may face challenges in the future, including potential market downturns, and may respond with consolidation. Despite their recent financial successes, they remain focused on minimizing losses.
Ocean freight industry undergoing shifts due to consolidation and new regulations: Despite challenges from consolidation and new regulations, the ocean freight industry is expected to rebound due to strong consumer spending and an increase in container capacity over the next three years.
The ocean freight industry is experiencing a significant shift due to various factors. The industry has seen consolidation, and while some players may struggle if prices drop below their costs, the consumer's spending on goods in the United States remains strong. This could lead to a rebound in trade volumes. Additionally, the International Maritime Organization's new rule requiring ships to reduce carbon emissions by 13% will result in a 4-6% reduction in capacity starting in January. However, over the next three years, there will be a 25% increase in container capacity as new ships come online. These factors suggest that the price of shipping may need to decrease significantly for the industry to return to previous conditions. Despite the challenges, it's important to remember that the ocean freight industry has historically been cyclical, with periods of profitability followed by extended periods of loss.
Preparing for the long term in cyclical industries: Businesses in cyclical industries must be willing to weather downturns to succeed in the long term, but short-term pressures and outdated practices can lead to capacity bottlenecks and supply chain disruptions.
Businesses, especially those in cyclical industries like shipping, need to prepare for the long term and be willing to weather downturns to reap the benefits during economic upswings. However, the pressure to generate short-term returns and just-in-time inventory practices have contributed to capacity bottlenecks and supply chain disruptions. The example of Hanjin, a Korean ocean carrier that went bankrupt despite having the right strategy and assets, illustrates the challenge of surviving long enough to see a strategy through. Despite the lessons from the past, it seems that many businesses may not learn and will continue with outdated practices. One tangible outcome from the supply chain issues is the Ocean Shipping Reform Act, which requires ocean carriers to provide the availability date of containers to help prevent unnecessary fines. However, it remains to be seen if this is just another example of the economy forgetting past challenges.
Learning from industry crises to prevent recurrence: Regulations and external forces can help mitigate shipping industry cycles of overcapacity and subsequent booms and busts. Long-term solutions are crucial to prevent recurrence.
While humans have the ability to forget and move on from crises, the cyclical nature of shipping industries means that overcapacity and subsequent booms and busts are a persistent issue. The implementation of regulations or other measures that force change could help mitigate these cycles. For example, environmental regulations have had this effect by mandating emissions reductions, which can only be achieved by slowing down production. However, without such external forces, industries may continue to race to the bottom, leading to overcapacity and subsequent busts. It's essential to remember the lessons learned during these crises and consider long-term solutions to prevent them from recurring.
