Commentary: Avoiding shipper seasickness
The Agility Emerging Markets Logistics Index that we published in January pointed to a swing from air freight to ocean freight. Overall ocean volumes in and out of emerging markets grew by 1.7 percent at the expense of air freight which fell by 2.4 percent in 2012. No surprise there — and there is every indication this trend will be just as dominant in the coming year, on the back of ongoing cost constraints.
The 2013 index pointed clearly to the trend of near-shoring. It was apparent many companies are rethinking their sourcing strategies and concluding that near-shoring makes a lot of sense for a variety of reasons. It allows them to improve their speed-to-market while shortening supply chains, reducing fuel and transport costs, and an over-reliance on suppliers in less-than-stable countries. Near-shoring then plays into one of our customers’ top-of-mind priorities — how to reduce exposure to risk. And the near-shoring trend is only accelerated by rising labor costs in China and India.
Both Mexico and Turkey were highlighted in the 2013 Index as becoming more attractive to investors because they are geographically well-placed to service the large U.S. and European markets. This trend might look set to reduce global dependence on ocean freight in the years ahead. However, the twist to the story is that even while companies leverage these gains, they need to keep an eye on fast-growing consumer demand in emerging markets — and not only in China and India. It will be a balancing act in the coming years as to where you decide to produce. Do you near-shore to take advantage of today’s markets or do you “far-shore” to service the fast-growing markets of tomorrow, or a combination of both?
The rise in transport and fuel costs has been a major factor in driving the near-shoring trend. While this is outside its control, the ocean freight industry could be doing a lot more in terms of improving customer service levels and its value proposition. Slow-steaming absorbs excess vessel capacity and cuts fuel costs, but our customers don’t see rates correspondingly reduced for slow steaming services. Shippers are paying the same for their goods to be stuck at sea for extra weeks while they have to cover increased inventory costs. Some customers are willing to pay for a premium service with faster transit times, but few lines are offering two-tiered pricing.
Faced with the prospect of slow-steaming and corresponding extended transit times, there has even been some modal shift bucking the global trend, and moving in the opposite direction away from ocean to air freight. In addition to lengthier delivery times, ocean freight rates remain inconsistent and come with a large range of fluctuating surcharges. Long-term fixed rate commitments from the ocean carriers are hard to come by. The result is a lot of unhappy customers.
What’s for sure is that ocean freight has an opportunity on the back of the global slowdown and the cost advantage it represents. With more customers now in the habit of using ocean freight and building strategies around it, it may be the case that they will not migrate back to air freight when there is an economic uptick. But the industry can try a lot harder to make the most of such an opportunity — its main value proposition has to be much more than basic ocean transportation.
- Cas Pouderoyen
senior vice president of the ocean freight product, Agility,
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