The Logistics Tribe

The Logistics Tribe

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00:00:01: Hello and welcome to the logistics tribe I'm boss felgendreher founder of the logistics tribe in today's episode is a deep dive into the current ocean Freight crisis,

00:00:14: which is one of the most important business topics of this year and maybe not next year.

00:00:19: That's been said about this topic but Today's show was certainly one of the most clear and comprehensive analyses that you will find on this topic anywhere.

00:00:26: But I think that's because our guest today is Young gutschmidt who spent his entire career of 30 plus years in the industry on both sides of the aisle he spent two decades at Mercy.

00:00:37: And another decade leading the ocean Freight team at Nestle the largest food company in the world

00:00:41: he's now at sea-intelligence a boutique Maritime intelligence and analytics company so it's hard to find someone that is closer to that space

00:00:49: then Jonas our host today is Jonah McIntire

00:00:53: who many of you may know from one of our latest Logistics try podcast episodes where I talked to him about as often times very contrarian views on the world of the district's if you haven't already done so tune in to that episode as well but today it's Joan as the host and he brings you your on gutschmidt,

00:01:08: Joy hello and welcome to the logistics tribe.

00:01:14: My name is Jonah McIntire and today's guest is your couch met the author and I are going to be speaking about ocean Freight procurement.

00:01:21: He'll be sharing some of his insights having spent decades in the industry first on the carrier side with impressive list of rotations through the world.

00:01:31: And then later at Nestle doing Global Freight procurement.

00:01:36: Okay before we start talking about market conditions I think those who haven't heard your name before would just like to hear what is your background you open right yeah thanks Joanna thanks for having me first of all.

00:01:48: Thanks for the quick intro yeah I think it's true just half year ago someone made.

00:01:55: Me aware of the fact that I've been in the industry for over 30 years now so that was a little bit of a shock I have to say okay yeah Kate's indeed,

00:02:03: no but the truth is

00:02:05: I have peeing in Ocean shipping essentially all my life I started my career as an apprentice with hapag Lloyd for three years so that was a marvelous time really down to the basics and.

00:02:16: That wasn't the 80s really.

00:02:18: Um and then I started after that I started what I think was a pretty International career I started in South America a little bit in the trend business.

00:02:29: Then what back to one back to Europe back to the liner industry and I joined mask with.

00:02:35: And and with big blue II then remain for more than two decades really all around the place really in Europe and Copenhagen and Hong Kong Singapore.

00:02:45: Saudi Arabia as well I had a stint and then after

00:02:49: just over two decades in Ocean shipping I kind of jumped the fence and because you know how it is right the grass is always greener on the other side as they say indeed yeah and which,

00:03:02: in the beginning I thought was true anyway but then I joined the National a big big food and beverage company

00:03:10: it's all packaged food packaged food as they called it as well here in Switzerland and their world headquarter in Vivek.

00:03:18: And that was leading the global logistics procurement function for just short of a decade as well so.

00:03:27: I'm so I have been on the supply on the supplying side on the shipping side as well as on the shipper side so shipping line and ship aside so I know both sides pretty well.

00:03:36: And then last year we got together with sea-intelligence and.

00:03:42: Um which is I think a fairly well-known provider of Maritime intelligence and Analytics.

00:03:49: And we started an advisory function and the timing was apparently fairly good.

00:03:54: I'm trying to help based on that experience trying to help Global shippers or Global Market participants in in writing,

00:04:02: this wave during this you know what one could call crazy time so but basically end-to-end advisory on procurement operational management Improvement execution the whole the whole end-to-end process on International ocean shipping.

00:04:17: So that's what I that's what I do okay so you've had this career that's gone all over the globe with carrier operations then procurement and now you made this fortuitous switch to advisory.

00:04:30: In a period within the last 18 months advisory on Ocean procurement must be through the roof right it is and you know I think you know if I recap the last,

00:04:43: what about six six eight months or so a little more that is really the most.

00:04:51: Frequent question that we get is you know when is all this over and and obviously that you know that's a question that's very difficult to answer and I think nobody has the answers really I think we're going to talk about you know about that a little bit during this podcast.

00:05:04: Um but that is the most frequent and the most well difficult or perhaps even unrealistic or whatever question I don't know what fits best there but it's.

00:05:14: But that's that's the big question out there when is this over when do we get to you know whatever you can call normal although that's a difficult term as well normal so people are coming to you they're asking when are things going to return to normal.

00:05:28: Before we get into that this acute pressure I want to hear a little more about the scene so.

00:05:35: For people who aren't intimately following the ocean Freight procurement space.

00:05:40: We can we know that there's fast crunch we know that there's pricing pressure but what is this is this a long-term Trend that's been playing out over a decade or decades.

00:05:51: Is it a mid term trend is something that's really acute and related to the pentatonic you know help us understand the big picture here

00:05:59: before we get into the details right yeah good question Zona I think in a nutshell really so what we are experiencing right now what the market participants are going through essentially is really.

00:06:12: Predominantly a covered induced problem that just takes very very long to kind of.

00:06:20: He's itself so really the root cause is the the the epidemic developments that started last year.

00:06:30: And and and that's what we are trying to get out of or trying to make peace with or trying you know trying to find our space.

00:06:40: But that is only the last year so that's kind of ten percent of the last decade and we have seen.

00:06:47: Well similar situations in 2015,

00:06:51: it also depends a little bit you know what problems were talking about is it congestion because there are lots of attributes that.

00:06:58: You know that this situation has it is it is disruptive overall but so which areas are we talking about so 2015 we had.

00:07:08: The labor crisis on the west coast as you may remember and we had another you know a couple of other.

00:07:14: Black Swan the Wednesday events I think we call them the you know the hanjin bankruptcy the Cyber attack with with Maersk line.

00:07:22: And and so on and so forth so we had plenty of Crisis he's.

00:07:28: But otherwise if you if you want me to elude on that you know what we have seen and what the trends and what the focus area were in the last decade is that what you're after as well or,

00:07:40: let me try to take it from another angle so,

00:07:43: let's say that you've got your procurement officer your supply chain officer and go in to visit their splotching doctor and the doctor says him down says all right so what's the pain what right here wait what are your symptoms right.

00:07:58: Okay what I would I guess we'll start with what are some of the things that are at the acute pressures that are being placed on these people,

00:08:06: I use it cost is that things moving not moving right is it risk

00:08:11: what would they say are their main symptom right okay I got you so I think there are there are predominantly two things really that that you know from the shippers perspective from an importers or exporters perspective,

00:08:25: there are I think two key elements that.

00:08:28: That prevent people from sleeping at night right now one is operational disruption so Supply chains are broken nobody knows when is,

00:08:38: when I orders ship when do they arrive when can they get on the shelves so just really physical disruptions delays Etc,

00:08:45: so the physical reality of today's supply chain of physical supply chain chain environment that's one thing on the one side and on the other side is,

00:08:54: it is an amazing inflation in the area of ocean Freight

00:09:00: um but Logistics expenditure overall it's not only ocean Freight but obviously ocean is I think the key you know takes center stage of what we are discussing right now so it's these two elements it's terrible service.

00:09:14: Um

00:09:16: Amazingly increased rates if you compare it to just a year ago so that's that's why why people spend a lot of time in PowerPoint making smart slides and try to explain,

00:09:28: in an attempt to explain to their leadership what is going on those are the two elements that's pretty concrete so a supply chain officer or Logistics director procurement director.

00:09:38: There are two concrete pain points are going to be a breakdown in the physical flow of goods or

00:09:44: a significant increase in their ocean Freight rates that's something I think everyone can relate to right now it's the next question is to what extent this is really outside the norm of our industry because

00:09:56: right our industry always has something to talk about its fuel,

00:10:00: you know it's oil rates going up it's a lack of capacity its brexit it's this and that,

00:10:07: so are we really talking about a real change to the industry something that has sort of never been seen before or we talking about the slow give and take,

00:10:18: and Supply demand that would,

00:10:21: normally be observed in the industry and what's your name and that's not to say that I don't believe there's pain here I just let's try to quantify it a little more you know ocean shipping you know it's vessels going from you know from

00:10:33: ports in one geographic area and then sailing towards another geographic area.

00:10:38: Um which is a trade Lane so you know Common trade Lanes is Asia Europe or trans-pacific from Asia to North America those are the largest ones are the most significant ones or the most prominent ones perhaps.

00:10:50: And of course every Market has you know every Market has their own Dynamic so there is not this one number you know that that depicts how prices have increased.

00:11:01: In every possible global trade perhaps there is an average but everage has are obsolete in this context I suppose but.

00:11:09: But let's look at the the two key traits that are that are that people are mainly focusing on right now,

00:11:15: which is from Asia to Europe as well as from Asia to North America.

00:11:21: You know if we look at the the spot Market you know which brings me to another thing I don't want to make it complicated but obviously they're you know there are folks who are in the so-called spot Market you know they they have a very Dynamic trading environment,

00:11:35: which means a lot of ad hoc possibly short term trades that they do and you know as such as a consequence of this they have to enable the supply chain.

00:11:46: So people who buy on the spot Market can you know can pay prices that are is as high as eight hundred percent,

00:11:53: compared to what they what they were a year ago so anywhere between six and eight hundred percent it at the end of the day it really depends also on.

00:12:02: Which particular Corridor even you do business so those are obviously gigantic increases.

00:12:09: You know it's only roughly half I think of the folks who actually transport things are in this segment the other segment our contract customers.

00:12:17: You know who have their annual service contracts again on both traits right it doesn't you know there's not a big difference there

00:12:23: and for those people who continuously ship you know Goods across the oceans with service contracts there I think.

00:12:36: And point of orientation is there

00:12:39: Freight rates probably doubled roundabout doubled step double if you compare it to the referee and that's doubling

00:12:47: as in they were renegotiated or the or in the next contract wave well you do this year after year in a way right so you know before 10 do before I contract is,

00:12:58: so after the contract is before the next contract right so this is ongoing this is an ongoing thing and got it okay and you know from from people that I spoke to that have these regular Contracting periods on an annual basis or so.

00:13:12: Um you know their expenditures their costs went up around about a hundred percent of course also there it can deviate and maybe really,

00:13:21: yeah you know different from customer to customer but that seems to be kind of a rough number that you know that's what I'm hearing anyway,

00:13:30: so doubling which is significant all right it's amazing and having a hard time Imagining the budgets of these companies which frankly underlined the whole industry but,

00:13:39: let me without taking us too far off the path let me just switch views for a second say for these interactions these contracts and the spot rates there's got to be somebody else on the other side the counterparty whether that's the freight forwarder,

00:13:53: or the asset operating carrier.

00:13:56: And yeah I'm curious how is it for them is are their costs actually increasing in line with these rate increases or is this just bumper profits driven by excess demand that they can capitalize on.

00:14:10: With enlarged rates so essentially I'm asking the question,

00:14:14: is this a crisis on the other side or is this just massive opportunity for forwarders and acid operators right good question

00:14:22: I think you have to differentiate between the actual the physical asset providers or the shipping lines that operate the vessels,

00:14:29: and I think you mentioned forwarders are nvocc S as we call them the the non vessel operator common character common carriers you know those who by ocean Freight and resell so for shipping companies I think it is fairly straightforward.

00:14:44: Um the these this incremental Revenue goes straight to their bottom line as it is evident from their annual or quarterly reports that.

00:14:53: That we have the pleasure of reading as they come out so there is a lot of evidence that.

00:15:00: It's really a golden year for shipping companies although I think North End is it needs to be mentioned that.

00:15:07: Their costs are going up as well and I guess we would be talking about this like congestion and so on I mean these are.

00:15:13: Incredibly costly disruptions for shipping companies as well so not every dollar that they make incrementally compared to pre free covered,

00:15:22: X is going straight into the bank so their costs are also up right and for,

00:15:29: for those Brokers for forwarders or nvocc S it you know it depends a little bit you know the nature of a broker is they you know.

00:15:38: Perhaps if somewhat simplified you know they always make their Buck you know whether the market goes up or the market goes down right I mean they always have this this this cut,

00:15:47: and frankly I think also most of the forwarders their annual reports or quarterly quarterly reports suggest very healthy Business Development both in terms of volume and in terms of profitability,

00:16:01: so I think.

00:16:03: I don't want to call them beneficiaries of this but they're also in a good space at this moment right no judgment of course on the fact that they've had these bumper profits.

00:16:15: That's just market conditions but I do wonder what they do with them now so is this fueling Mna activity is there going to be further consolidation.

00:16:25: Because of it is it.

00:16:28: Just going back out as dividends you know that that old thing that we used to do and things were profitable is it being used to pay down debt is it going into Greening out the fleet's you know the ocean Freight,

00:16:41: industry has a long way to go to become carbon neutral where is this money being reinvested yeah you know that's that's that's a good question honestly I think it's a little bit of both.

00:16:54: Here you know I clearly want to label this a I'm not a shipping company right so I don't have to make these decisions but let's see what we can see you know let's look at the.

00:17:03: Let's say the the market facts that are visible for everybody so people are.

00:17:08: And that leads me perhaps later on to to loot another problem but obviously people are ordering ships again so you know last year essentially nobody has ordered ships because everybody was,

00:17:21: especially at the beginning as we unite as the as the crisis.

00:17:27: Got really really serious and trade almost came to a standstill one could say or in China anyway so nobody was even thinking about ordering vessels and now I think

00:17:37: I don't have the exact numbers of hand right now but but I think the order books of yards are Chaka block,

00:17:45: again so so obviously there's although you know Kerry has never really hit had apparently any problem with buying ships even before the crisis or before this,

00:17:57: this that the current market situation but the order books,

00:18:00: are full and it is even I think somewhat problematical to buy ships and to to place orders at this moment so they're doing this and obviously,

00:18:11: um you know this is very modern tonnage I think just a couple of days ago and mask announced that they are ordering some vessels that I that can run on methanol to your point of you know Green shipping so obviously in this migration we have already seen it with,

00:18:24: um over the last year's so this is completely unrelated to the pandemic.

00:18:29: But there is a lot of pressure on the shipping industry to become Greener let's say or even green or you know CO2 neutral or greenhouse gas emissions neutral.

00:18:39: But I think 2015 50 most of the commitments I've 2050 I believe and that will obviously have a cost hack as well throughout the operation not just the vessels but also terminals Etc so the all infrastructure will.

00:18:51: We'll have to to move on those phones and that will cost some money so I think it's a mixed bag.

00:18:58: For forward as I'm not quite sure I mean many of them are very acid light so what you know could be interesting to to both shipping companies as well as,

00:19:09: the forwarding space is the consolidation that you've mentioned Mna activity.

00:19:14: Um we are seeing this in the forwarding space DHL has just taken over hillebrand and before that agility Saudi is you know.

00:19:24: Agility was absorbed by,

00:19:27: by dsv if I'm not mistaken so there has been some activity that I but I'm not sure what that that is really you know due to the the,

00:19:36: the financial Liberty these people serve as a result they have as a result of the pandemic I I doubt that but it's not something I could I could say it's not my area of expertise.

00:19:47: But shipping companies definitely are investing I think consolidation on the large within the top ten segments or even top 15 second our top 15 maybe by top ten segments I,

00:19:59: I do not expect perhaps further down in the volume,

00:20:03: tree that may be the one or the other carrier will be picked up but otherwise I don't expect any significant significant movement there,

00:20:12: so what we've got here described earlier as we've got these two pain points the physical flow of goods is slowing down or becoming unreliable,

00:20:21: the cost of physically flowing those goods has increased you know a hundred to eight hundred percent.

00:20:28: For ocean Freight which is substantial most of that is going over to profits for the asset operators,

00:20:36: maybe not so much for the forwarders now you did mention that you think this was all triggered by the pentatonic and not by larger Trends so I'd like to just double-click bid on that what is the mechanic exactly the met the mechanisms that you go from a.

00:20:51: Novel virus in the pandemic,

00:20:53: that turns into a capacity Crunch and then evolved to this right well there wasn't a pollution I think right so how did it all start so first quarter last year when the pandemic.

00:21:07: Broke out and,

00:21:09: you know China maybe I'm exaggerating a little bit but just for the sake of making the point so China essentially closed down trade almost came to an end all the factories were closed so

00:21:21: you know as a result of the demand in free fall you could say carriers significantly significantly reduce the capacity that.

00:21:33: The most deployed again mainly coming out of China because China is the factory of the world right so proportionally the biggest part of the maritime assets are deployed to and from.

00:21:45: Um so.

00:21:47: But you know that lasted a couple of months in the meanwhile the the you know the pandemic also made its way to North America to Europe essentially we don't have to tell you that everybody knows that it went truly global.

00:22:01: With impact on consumption in Europe for instance in North America nobody was going out nothing happened so.

00:22:09: So you know just so exaggerated a little bit let's say trade almost came to an end or to a standstill so volume was very low.

00:22:18: And then later and summer you know as people as we came out of the first terrible wave.

00:22:26: Of infection and disruption people all of a sudden started to spend money again and if I say people I have to say people in North America,

00:22:36: you know all of a sudden there was an amazing run to all the DIY stores in North America I think you know where people started Home Improvement projects and.

00:22:46: And another things because they couldn't go to restaurants they couldn't travel right so there was there was there was a lot of cash apparently

00:22:55: at their disposal and they decided to spend it as I understand they do quite frequently so it's not necessarily A saving Nation I think I don't know but your may know more about that well it's funny but you mentioned something that's really structural so if you look at

00:23:10: how the u.s. responded to the pent emic there were these stimulus checks and,

00:23:15: came early they came frequently there were multiple of them and they were entirely focused on consumption that was no one intended for those to go into savings right or retirement funds it was supposed to be.

00:23:26: And also you had a more flexible labor market than in Europe so everyone who's a cook or a waiter in the u.s. spend some time and,

00:23:33: Amazon Fulfillment centers right because they were out of work and the intention was they just go work someplace else whereas in Europe you've got these furlough schemes,

00:23:42: and the money from the Recovery Fund isn't even going to be dispersed until 2022 in most cases,

00:23:48: it's just different Peridot yes you are absolutely right in saying that and

00:23:53: so demand in Europe went down and also you know it was reading it it was coming to a hold almost right and but when people started spending again it was nothing compared to the u.s.

00:24:04: So the growth levels the market or business growth levels we see in Europe in terms of volume in terms of containerized trade.

00:24:13: Is back to normal growth levels that we had even before the panda.

00:24:17: Um so the truck the problem B which is like to three percent or whatever in volume terms and however.

00:24:24: The situation in North America was totally different that we had you know we saw a single did as sorry double-digit growth ratios 12 13 14 percent growth in volume terms and this came all of a sudden

00:24:37: and coming back to you know what you know what's going on what has caused all this so so in summer last year when when demand,

00:24:47: started to increase again and it increased rapidly and intensively.

00:24:54: You know containers weren't in the right space vessels had to be you know reintroduced,

00:24:59: so there was a wave of demand that the available capacity or the shipping companies let's say

00:25:06: we're really challenge to deal with and and this is where these disruptions come from so you know they at this point any conceivable capacity that is available in any container ship,

00:25:19: or even see me container ship started our in debatable is that are available in the market are deployed so which was also which is different than before so the capacity deployed right now is,

00:25:31: is much bigger in nominal terms than it was before the pandemic,

00:25:35: but it was this is amazing this amazing demand that that started and round about summer last year.

00:25:44: In North America that really disrupted and challenged the entire infrastructure from vessels to Ports 2,

00:25:52: to to equipment because obviously you know how it is that's the downside of containers right I mean they are great great invention but there is

00:26:01: you know you need to deal with empty equipment right so you have you know all the inputs that are coming into the u.s. sooner or later they will have to you know you fill them with our Curry and whatever comes out of the out of North America but

00:26:11: but the vast majority of containers are going back to Asia empty so that you know they can be filled again,

00:26:17: and in North America itself you also had lots of disruptions terminal closures you have Factory closures.

00:26:25: And so the time that equipment needs to arrive to be you know unpacked unstuffed as we say turned around and sent back,

00:26:35: to to Asia empty that time,

00:26:38: all of a sudden took much longer because there was more disruption along the way and this is part of this

00:26:45: of this problem that we're having and the terminals were also disrupted because of covid outbreaks labor shortages shortages and and many many other things that prevented them from handling

00:26:58: the incoming ships at a pace at which you know which they would

00:27:01: have to handle them so to speak and I think right now there is I think there are 40 vessels in front of Los Angeles Long Beach 40 vessels 40 container vessels awaiting to enter the port or wading birth

00:27:14: so they can offload their their stuff so.

00:27:17: All this is sucks okay but just put that in context for me 40 vessels out of a base of how many like how many would it be on a normal Thursday.

00:27:27: A year ago or two years ago,

00:27:29: I would say none I would say it so I would say it's zero okay so there should be no wait I mean a occasionally that could be a day or so but generally speaking vessels they will arrive and they will take their birth because everything has been planned through.

00:27:44: There so there shouldn't be any.

00:27:47: Structure will waiting time let's uh 42 0 well but we clearly see this and and these disruptions and these delays they're eating up a significant amount of capacity that is that is deployed,

00:28:02: and you know this can,

00:28:04: this can go up to up to 10% 10% roundabout given take 10% of the total capacity deployed.

00:28:12: Is kind of absorbed by all these disruptions these delays and so on and obviously this is then capacity that is missing well that's that's such an interesting point that you've got.

00:28:23: You've got this mismatch of supply and demand are you have to have too much demand anyway.

00:28:27: And in place of just being able to run as fast as full as possible.

00:28:34: You're saying that with because of these sort of congestion issues it even reduces the carrying capacity of the supply because the ships get there,

00:28:43: they're Laden their feet stead of turning them around and bringing them back with with more Goods on the sailing Loops they have to just hold.

00:28:52: Anchor I guess off of the off the coast waiting for the port to have burst for them that's super fascinating exactly exhale.

00:29:01: But then you can also I think it is it is it is important to say that you know we were talking about the inflation and ocean Freight and so on obviously I said it's not only ocean Freight right it's throughout the entire supply chain.

00:29:13: I'll physical supply chain that's a plus,

00:29:15: you may have read about this in the news or you may even have seen it or realized it in your local grocery store that a lot of cost for for for materials for Commodities have also gone up at the same time as,

00:29:29: as has the you know the cost for energy right everything went up so it's not only it's not only ocean Freight that went up there we've seen that.

00:29:36: Yeah General business right so we see that all forms of inputs are are increasing a cost we have this across-the-board inflation but particularly.

00:29:46: And the us but really globally as well,

00:29:49: and I could understand how that would relate to some of the rise but hundred to eight hundred percent in this time period That's that is a story in and of itself around ocean Freight.

00:29:58: Let me try to recap what we've heard until now you're saying that supply chain owners has put procurement professionals they will be experiencing one hundred to eight hundred percent rate increase right now that's a pain.

00:30:11: And that this pain really relates back to the pentatonic as its root cause yeah and that the mechanic of how it relates back is that first China's Global Factory world's Factory,

00:30:23: First China was had the pandemic and that shut down Factory operations,

00:30:29: at the very beginning so Supply dropped then the of course pandemic went to other places that their demand dropped.

00:30:37: The Operators that carrier operators took capacity out of the system in reaction to this new world.

00:30:44: And then demand went way up faster sorry well faster than expected in places like the US and Supply just wasn't there I mean it wasn't there in the factories but it also wasn't there and.

00:30:57: Ocean shipping so carrier capacity and that that we're still working through the backlog of that Surplus demand is that right that's correct yeah

00:31:07: in a nutshell that's that's I think that that hits it on quite well yeah that's it so essentially we have a situation that's painful today,

00:31:18: we know the approximate cause for it.

00:31:21: But what I'm hearing you say is that it kind of sounds temporary like to me it sounds like this is something that will resolve itself given time.

00:31:31: As demand either comes down or Supply eventually catches up.

00:31:35: I'm wondering if there's anything else here that makes it a fork in the road moment where the industry just won't be the same anymore because of this

00:31:43: yeah well that's that's the million-dollar question I think right so you know that's challenged with forecast especially as they relate to the Future.

00:31:53: You know I tend to at least I try to be a realist on these things so.

00:32:00: So what we what we would be seeing I think in the future is.

00:32:07: You know carriers have you know what they've done last year in terms of taking some of the capacity out.

00:32:15: As demand just vanished almost right they've done this before in order to,

00:32:22: let's say manipulate the market in their favor right just you know we reduce Supply you know just to keep ocean Freight rates you know coming to a level where they could possibly make a profit

00:32:33: and and they got.

00:32:37: Quite good at that and if I say quite good at that then I mean you know they can do it very quickly they do it very professionally in a very structured manner so I believe this is here to stay,

00:32:50: um I also believe that the current demand,

00:32:54: profile that we see again predominantly North America I be honest I don't think it's you know I don't think it's sustainable so it will you know that that is I think North American.

00:33:07: Consumption or demand will come back to you know what we may as well refer to a normal level.

00:33:14: Of consumption I believe okay then there is still a little bit of a gap because inventories in North America also very low you know so I'm sure that you know especially in e-commerce and so you know people will be looking at replenishments a little bit so,

00:33:28: so that will that will keep this demand curve pretty high for a continued period of time possibly even after demand kind of normalizes but it will normalize.

00:33:40: And I think in Europe we have to.

00:33:45: You know this demand Peak or is strongly increasing demand is something we we either,

00:33:52: yet have to see because we haven't seen it or it is not already is not coming because you know people in Europe will spend their money on other things such as travel,

00:34:02: much more than than than Americans so I answer not on the physical Goods you know exactly rather than

00:34:10: you know buying stuff let's say I'm so it's essentially a service economy saying that the concentration of the buying and Europe is around Services rather than the physical change physical Goods

00:34:22: yes yeah yes that's that's what I believe why do I

00:34:25: why do I believe that is because people have also in Europe people said you know we had so much time home office so they were doing home improvement and stuff like this as well but maybe they do it differently but you know we simply haven't seen this this explosion and demand so,

00:34:39: quite frankly if we see it.

00:34:42: If we see it going up I mean apart from the norm of seasonality you know for Christmas or so that I don't expect it to be as as wild so to speak as we have seen it or are seeing it in North America because again because they will they will spend their money,

00:34:56: in mind the service sector so back to the carrier so I think you know very discipline capacity management is something that,

00:35:06: that carries will do because.

00:35:10: You know they've never had anything like this before I think ever really you know they are coming out of the decade of essentially.

00:35:20: Evident neutrality I mean there was no real money made in global liner shipping over the last decade.

00:35:30: At least not to any shareholders satisfaction and so.

00:35:36: I truly believe that you know they can't read hidden rate levels that we see at the moment,

00:35:41: but they will definitely do whatever they possibly can to absolutely prevent the market to a gone back to where it was pre covid where we had an overcapacity over

00:35:53: you know overcapacity environment and people were barely making any money and they will do this through through very diligent capacity management because that's essentially all they can do

00:36:04: right is an acid as it heavy industry right so that that was named you but you mentioned something that's very fascinating.

00:36:12: Anybody has been around this industry over the last 10 to 20 years would note that.

00:36:19: Carrier asset owners have really not turned the kind of profit that anyone expects they.

00:36:26: They simply have not been a profitable business.

00:36:31: Yeah I don't mean cyclically I mean over the Long Haul right we come back to the discussion of how intentional that was but,

00:36:39: but the reasoning is always been same it's as you said it's the only thing they can control is capacity it's a supply-side driven.

00:36:49: Question about the profitability they've simply.

00:36:54: Added at it kind of every key moment they've added too much Supply right they built too many ships a bit larger ships and they've brought as a result of brought the rates down now when I look at a,

00:37:06: market conditions like they are now rates are a hundred to eight hundred percent higher and goods are still moving.

00:37:13: Mess sort of wonder if leadership in these businesses or the backers of these businesses are just going to say.

00:37:19: Hold the rates you know what why if they can ship it 100-day 10% higher now then.

00:37:26: They can keep doing it next year and the year after and and so on right if there's people willing to fill the boats at those rates.

00:37:34: So I guess my question is what can they not do that why couldn't they do that.

00:37:40: And then if they're not going to if there's something that's going to knock the rates down are they going all the way back to where they were pre-pandemic or is it going to be something in between something North.

00:37:50: Well I certainly believe that they will end up north of what it's been pretty covered that's that I'm absolutely convinced but I think they can't and neither do they have the aspiration.

00:38:03: Um to to maintain current rate levels in the spot segment as I've mentioned before right very important so these these $15,000 18,000 20,000 dollar rates that you read about it's only a market minority that actually pays that,

00:38:17: um or it's just a part of the market that paste that so by all means no,

00:38:24: that they will be north of what they paid or what the market level was pretty covered and frankly it also has to be north of what a common rate was pre covid-19,

00:38:34: because as I said you know shipping companies coming out of a decade of essentially no significant profits so.

00:38:44: And they need to invest into modern tonnage into modern equipment into.

00:38:48: Is sustainable technology so all this has a cost X so you know Frankie and I was on the other side of the fence so I you know I took advantage for almost a decade of these low prices.

00:38:59: But I but at the same time I knew and I also mentioned it you know that essentially this is not sustainable I mean we are in a in an environment where where money is available at essentially no cost right so they were always able to kind of renew their,

00:39:14: there are ships and everything and they did so much more than they would have had to.

00:39:20: But of course you need to you need to generate a profit and and you know who wouldn't have that aspiration but but these and I'm sure shipping Executives would agree that of course these.

00:39:32: The rates that we have seen right now.

00:39:35: They have he don't they're just a product or a consequence of the current reality it is not where.

00:39:43: And I think there is a little bit of exploitation as well frankly on the carrier side.

00:39:48: But but they are not realistic these are not realistic rates you know once things kind of come down a little bit you know will it be.

00:39:56: You know 50% higher than three covered over that I you know I don't want to I don't really want to shoot a figure but it's going to be clearly higher than what it was pre covered I'm sure because this cycle.

00:40:08: You know that one you know some folks may may suggest that the cycle that is,

00:40:14: becoming visible again now so lots of income you know Market isn't the table at the carrier's they have a lot of cash they go out by new ships creating over capacity with you know and to look The Logical consequence should be.

00:40:28: Rates go into a free fall this is what they will try to prevent because this is what happened over the last decade or so,

00:40:34: right it was always the same cycle and and and obviously this this is not sustainable so I don't get will have one of the things I think that to mention is that.

00:40:43: These organizations is asset owning carriers when they were putting out more capacity driving as you said prices into freefall,

00:40:52: you know they knew that they were driving the prices into Free Fall they were essentially playing a war of attrition a price war in which they would.

00:41:02: Put out larger ships you know these huge ships are modern ships that would have lower fuel costs for example,

00:41:10: and it and then drive the price down towards the.

00:41:14: Now the barely Break Even point on those ships even and piece-by-piece drive out their competition.

00:41:21: Either truly putting them out of business or making them amenable to an acquisition right so.

00:41:30: When I look at this I kind of Wonder can't they just go back to that strategy in other words imagine World War One Another War of Attrition,

00:41:38: I kind of imagine if they had had a break where everybody for 18 months could sort of rest and feed and put grains into their granaries and recruit fresh troops and re-equip.

00:41:50: They might have just gone back into the trenches you know 18-24 months later.

00:41:56: Restocked and started the war of attrition all over again you know do you see I guess the question to you is a expert in the domain is.

00:42:04: Do you see anyone else coming out now any of these players coming out and out of the gates out of this cycle,

00:42:13: and simply going right back into the war of attrition to increase Market concentration and drive out their competitors.

00:42:22: Yeah well I think that's a good question I think nobody has I know buddy I don't think anybody has that strategy I mean fact of the matter is that.

00:42:32: The large cash profit heavy or cash heavy carriers.

00:42:37: It could sit it out longer you know if market dynamics when clearly against them again and say whatever you're so right so they could they would have the capacity they would have the strength to financial strength,

00:42:51: um to to sit it out at least longer than others of course you know that I think that's the same in any industry.

00:43:00: Um so this is not this is not specific to to Ocean shipping really but but what you're saying is that even,

00:43:09: these companies that previously were intentional price where's now that they've restock their Capital you don't think they're going to resume that no I know I don't think so and I would not hope so I mean that that's a I think that,

00:43:22: that's a very you know maybe that would have been possible you know 15 years ago or something but 10 years ago but I don't think it is you know because they are ready they are ready they're ready came out of a Face-Off,

00:43:35: of unprecedented consolidation you know if you look at if you look at it a couple of years back and you see now the carriers that were that were around doing during those times,

00:43:45: and and if you look at the market structure right now you have you know the ten top ten carriers have have more than 80% clearly more than 80% market share so so I think,

00:43:56: I think the appetite you know among among these top 10 the appetite and the opportunity for more Ma,

00:44:06: I question but that is my personal opinion so I don't think this what happened no matter what.

00:44:15: Some Executives you know may think or strategize for but I don't think this is hap there's this this is happening but,

00:44:22: again you know my my my opinion it because it would be a it would be a capital despoil money destroying strategy right.

00:44:34: It will come at an Incredible cost EXO and that's what I said before I think that is what they will try to prevent I mean these rock-bottom rates you know that barely break even.

00:44:44: Or even loss giving so I mean there is no incentive to to allow the market to.

00:44:50: You know to go back to those levels again and I think you know if we if if I may you know there is okay there is.

00:44:58: They're they're they're shipping companies and they are controlling capacity but I think also the market you know the market is too thin it shipping companies on the supply side and it's the ship is on the demand side.

00:45:12: And and Chip has really had the upper hand over the last decade quite clearly I hit it and I you know I was there I know exactly what I'm talking about and and I think,

00:45:21: and I think those days are also counted so I think the relationship between shipping companies and and shippers,

00:45:29: will also evolve as a result of this of this pandemic because you know.

00:45:36: And we need to focus a little bit on the demand side here as well you know what I should possess doing to deal with the situation what that what have they learned.

00:45:44: Um what lessons or what experiences have they made over the last year year and a half one could say and and you know.

00:45:53: How is that implicating their future strategy so and I think that was some some recognition and despite these whole rates there is a lot of recognition and understanding also out there on the ship of side.

00:46:07: That obviously shipping companies should not return and it's difficult to return,

00:46:12: business practices you know that were seen before the pandemic.

00:46:17: Because shippers were part of the problem right so so they will have they will have to come out of their Shadows step out of the Shadow and beef it up a little bit as well in terms of business practices so if I die recap this if I try to,

00:46:31: try to paint a picture around what you've described you've got an industry with acute pains right now.

00:46:38: Root cause in the pent emic and an imbalance it supply and demand but.

00:46:46: And it's producing bumper profits for The Operators maybe not for the forwarders but for the asset owning carriers.

00:46:55: But you think that what's going to happen here is we're not at necessarily the fork in the road it's it's going to simply be part of the evolution of the industry.

00:47:04: I am and that what's going to happen now is we're going to arrive at kind of a new place not this place forever not go back to pre-pandemic,

00:47:13: but something in between yeah I think it'll one lesson if I can just chip in there I think one lesson really is.

00:47:20: Um that the people on the demand side so ship has supply chain leaders they have been reminded how,

00:47:30: how can I how can I say how sensitive the network is and how important ensuring Supply is right so you know the last decade was purely a focus on cost cost cost and if this crisis has done one thing.

00:47:44: Among other things but one big thing is it brought,

00:47:48: global trade and transportation on page one so even the you know the ordinary dude walking the High Street knows about this you know the ever given Suez event and how it impacted global trade.

00:48:01: What the market dynamics were following that event so I think there's much more awareness,

00:48:08: within Supply within supply chain leaders although among supply chain leaders that you know what is happening in this in this industry how critical and crucial it is,

00:48:20: um maybe then you before but.

00:48:23: Doll that the last 10 months or so they were painfully reminded of how important what role.

00:48:31: Shipping container shipping place in their business and and I think that that will also lead to,

00:48:39: um you know more how can I say more Market related.

00:48:46: And realistic Behavior going forward and if not shippers will also be forced into this space a little bit and there again the shipping companies will will try to you know to use the momentum,

00:48:57: to not allow shippers to do or act,

00:49:00: as they have in the past but 82 forecasting those shows special terms free time or these kind of things I think those days

00:49:10: way you could just write up your terms and conditions as an international shipper and every Shipping Company would accept those I think those days are over and I think supply chain leaders will.

00:49:19: Will realize that or have to have realize that,

00:49:23: oh that's a super fascinating point you know regardless of where the rates land just term and condition changes could be the move right yeah.

00:49:33: You know I'm just now going through my mind I'm thinking of all those terms those those demurrage days the free days the.

00:49:43: Everything all these these little Nuance he terms which.

00:49:48: And we think of as bilateral things but actually overall create really systemic problems on the on the supply side just make it very very difficult to have a optimize Network.

00:49:58: And a change in that would be well I be foundationally Shifting the.

00:50:05: Ocean Market in ways that probably Outsiders don't understand but insiders would realize oh wow that if we can standardize that stuff and make them.

00:50:13: Frankly more advantageous to the supply-side optimization could be huge.

00:50:19: But I'm just having a hard time even imagining what the Freight Market would look like without all of these Nishi bilateral agreements oh yeah absolutely and I think that's where.

00:50:30: You know procurement leaders are scratching their heads is because you know it takes quite some time.

00:50:37: You know to change your attitude right and and let's not forget shippers are coming out of a decade where they had the upper hand.

00:50:45: Right and I'm Pat simplifying a little bit but they could ask for.

00:50:50: Anything and everything almost right of course they would have to agree on the rate but otherwise.

00:50:56: It was a pretty free world out there and and I think as I've mentioned I think those days are over and people.

00:51:05: And I'm sure you know the larger the companies and the more dependent they are on global ocean Trends what they are already starting that actually I know this from some of the clients that we are talking they are already sitting down now,

00:51:17: or they have started already months ago to to strategize you know for their go-to-market strategy coming you know q1 2022.

00:51:27: Right and and so you know it's kind of it's going to be challenging it's going to be very very challenging and

00:51:34: well not to say interesting but that's just you know that's putting it very neutrally so to speak right but but nobody has it nobody has experience in the market environment like this I'm neither side right so this is new

00:51:46: two people this is a this is a Black Swan event in itself one could say commercial one okay you see painting interesting picture you paint a picture in which the sea,

00:51:55: plus I'd really increases in strength relative to the procurement right so Freight procurement,

00:52:04: and that one of the ways you see that playing out is a more active attention kind of Novel attention being paid.

00:52:12: To from procurement towards the needs of the supply side so rather than just dictating their own terms at at Market rates there,

00:52:22: you're expecting a sort of a normalization of terms.

00:52:25: As well as rates frankly ending up at a higher level than they were pre-pandemic.

00:52:32: And you said earlier that you don't think any other companies are going to return to their price aggression in the absence of price War.

00:52:42: You still don't see that those those individualized terms will be the way that people will be.

00:52:48: Competing instead it's going to be actually a shift of competing for the demand will be a chef to sort of optimizing to supply through through things like normalizing.

00:53:01: Contract terms is that right yes these are these are some points here these are some points I mean obviously there are many many others right but but these are definitely these are definitely some points that I think,

00:53:13: people will will have to confront and find a mutual relationship right and all one could also say a couple of relationships will,

00:53:21: probably need some repairing,

00:53:24: um before they sit at the table again to talk about the future but but yes absolutely I you know that's what I that's what I believe yeah it's going to be.

00:53:33: It's going to be a new reality in q1 next year.

00:53:39: Little bit comparable perhaps with already you know what people already experienced this year because there was a Contracting season during q1 this year also a lot of a lot of contracts.

00:53:50: Had to be renegotiated.

00:53:52: Right because the contracts were not sustainable the carriers didn't have the hidden kind of found their space yet and realizing like hey you know this is the new reality I can do things that I could never do before at least not the last 10 years so there was.

00:54:06: You know a lot of relationships weren't damaged but a lot of contracts also had to be renegotiated during Q2.

00:54:15: And and and I think yeah coming the next contract season I think you know some of the procurement leaders will be much more devote so to speak,

00:54:23: as they as they sit together hopefully they can sit together,

00:54:27: and it's not a video conference as they talk business for the shipping season 2022 2023 right so.

00:54:36: Yeah and.

00:54:38: And finance Finance ministers to yeah let's let's transition last question here want you to think about somebody in the industry,

00:54:47: I'm always wondering for myself anyway what's the play What's the Play From This Moment what how how does someone become a hero in their organization or in their industry,

00:54:57: out of the conditions that they're in front of them so let's think about somebody specifically listening to the podcast who might be.

00:55:03: You know shipping organization procurement or operations the other one.

00:55:10: Or someone who's in a free forwarding organization probably more in leadership or sales and what kind of coaching or mentorship could.

00:55:20: It could you give to them what would be a tactic or a play that they might think about bringing to their organization.

00:55:28: In order to become a hero there in order to really accelerate their you know their career they're they're standing in that that organization,

00:55:37: what what are some of the recommendations you have right that's a that's a very good question I think those who and this sounds a little a little strange perhaps.

00:55:49: But those who control their business the best.

00:55:53: Um will be the witness what I mean by that is those Market participants those shippers importers and exporters.

00:56:02: That are able to manage their business.

00:56:07: The best in terms of forecasting in terms of actually delivering what has been committed.

00:56:14: In terms of how can I say managing that that contractual relationship with shipping companies and and those that also manage their operations the best those will be those people would be the happy do,

00:56:27: well happy but but they will have clearly they would have an advantage to now over those who.

00:56:34: And there are many who don't because again they never had to live with with this degree of discipline everybody always said you know.

00:56:42: Yeah it's very important to have the relationship we always try and so on and so forth but but now.

00:56:48: You know the shipper would be much more accountable I could say going forward than they have been in the past so those who acts

00:56:57: excel in that that new reality with with all that Spotlight they will be on The Winning Side for forward as I'm a little hesitant to to to go into that because I don't see.

00:57:09: Frankly I hope I'm saying the right thing here but I don't see the role of the forwarded to evolve that significantly because the you know I don't see their role changing why should it change it's just new market dynamics that we see but the role of the forward.

00:57:23: It's still there but also their I believe the better they manage their business

00:57:30: you know the better they will be the better they will be positioned to to to handle the next contract season or the immediate future the midterm future let's say that probably doesn't answer your question,

00:57:41: entirely but that's at least my first thought on you know what comes to mind.

00:57:47: Well okay let me let me play it back to you with what I hear you saying essentially is that.

00:57:53: That the separating criteria the defining criteria between those who will have played this Market situation well and who didn't is how active they were yeah yeah so essentially you saying that.

00:58:08: The folks who are going to come out of this with a strong CB strong resume description of how they what they did.

00:58:16: 2021 are in the people who were forward-looking who weren't reacting simply to the failures of their procurement or if their relationships with.

00:58:28: Carriers in operations but they were looking into the future of and and taking measures for that well yeah I think you can only fix how can I say you can only fix the future if you are aware of your you're.

00:58:42: Your gaps in the past right and what they meant to your business and you mentioned the CVS I didn't mean this from a career management perspective but I mean this from a business success perspective and,

00:58:54: obviously in you know if we talked about this industry there is a.

00:58:58: There is a very all to be a very close relationship between procurement and the folks in you know the physical supply chain the people that.

00:59:08: Um and and there's a strong correlation all the data all the information only the the whole insights,

00:59:16: um that procurement needs comes out of the operation of business right so that's that's all the intelligence that the procurement people need,

00:59:27: to go to market and and to create their their boiler plates and their terms and conditions so.

00:59:34: You know call it you know that it's all these Buzz words that I usually try to avoid like like insights like trance you know transparency,

00:59:44: like visibility like agility like resilience right so all this needs to be all this is is on the table of.

00:59:53: To maybe achieve some sort of resilience and Agility right because you will need both.

01:00:00: In order to manage or to weather the storm so to speak and to to navigate and manage your business successfully also under these very very difficult circumstances so it's,

01:00:10: it's a lot about capabilities and an hour this is also stuff for it you know this could be another call really,

01:00:17: we didn't talk about digitalization and what happened and how did people evolve and.

01:00:21: But there is a lot of capability that is needed to really have a,

01:00:28: a convincing and robust go-to-market strategy for the next shipping season so that's really what I see on the on the on the ship aside carriers would be busy with,

01:00:40: you know trying to understand where is demand heading and and how do they how should they position themselves and.

01:00:47: And how disciplined will on the carrier side how disciplined Will the Market participants be with regards to what we've discussed before in terms of capacity management because there is an awful lot of capacity coming into this industry,

01:01:01: from at least 23 onwards so and that is not too far away.

01:01:06: So you know it's a lot of things happening on both sides of the fence so to speak there is also we haven't discussed this infrastructure terminals you know what are they supposed to do.

01:01:18: And what can they do.

01:01:19: But you know I just tend to focus on shippers and carriers at this at this point in time it's has been really fascinating for me I'm sure that people that snake have gotten something out of this somewhere along the way so I went.

01:01:33: Thank you hopefully we get to do this again you haven't so maybe a year from now we'll come back we'll check.

01:01:40: We're market conditions left us and maybe will be dumped out that we didn't see the next task you crunch it will be cool that's its beat you know let's mark our calendars in exactly one year we are get together again John,

01:01:51: exactly okay well until then though really really appreciate your time,

01:01:56: and thanks again for appearing on the podcast and Christian thanks for having me really really appreciate it

01:02:03: alright that was our ultimate analysis of the global ocean Freight crisis with Yahoo gutschmidt and Jonah McIntire I hope you find it as interesting as I did.

01:02:12: If so please consider giving us a five star review on a podcast and please subscribe to the logistics try podcast so you don't miss any of the future episodes I'm boss felgendreher until next time.

About this podcast

Boris Felgendreher, Dana von der Heide and Marco Prüglmeier invite you to listen to The Logistics Tribe, a weekly podcast about the world of global logistics and supply chain management.

You can follow the hosts on Linkedin:

Boris Felgendreher: https://www.linkedin.com/in/borisfelgendreher/

Dana von der Heide: https://www.linkedin.com/in/danavonderheide/

Marco Prüglmeier: https://www.linkedin.com/in/prueglmeier/

by Boris Felgendreher

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