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P3 or not P3, stability is the question

With the world’s three largest shipping lines planning to launch their vessel sharing alliance in Q2, now could be the time for manufacturers to review their use of international container freight services.   Ultimately this is developing a clearly defined commercial strategy for managing both shipping lines and freight forwarders that will lead to reduced cost and increased service levels to their customers.

The world’s three largest container carriers Maersk, MSC and CMA CGM are on course to start their planned vessel sharing agreement, called the P3, in Q2 2014 as it received approval from the US Federal Maritime Commission (FMC) on the 24th March 2014. The P3 members still await a response from the Chinese Ministry of Commerce, anticipated by May 10, but this is not expected to present too many problems, enabling the P3 to commence operations in the second half of this year.The P3 Network will create capacity of 252 ships and 2.6 million TEU across the proposed markets; Asia-Europe, Trans- Atlantic and Trans -Pacific. Although the three lines will share an operational centre, commercial activities will be separate under current EU anti-trust legislation.

The P3 Network is the latest alliance to be formed since the G6 Alliance began in March 2012 with APL, Hapag-Lloyd, Hyundai Merchant Marine, Mitsui O.S.K. Lines, Nippon Yusen Kaisha and Orient Overseas Container Line sharing services between Asia – Europe and expanding co-operation to Asia – North East Coast USA in March 2013. The CYKH Alliance of Cosco, K Line, Yang Ming and Hanjin Shipping has just announced it will add Evergreen to its ranks from mid-April and be known as the CYKHE.

So what does the increasing market consolidation mean for those reliant on the global container shipping industry? The shipping lines are essentially caught between introducing the larger vessels on these key services (Asia-Europe & Trans- Pacific) that offer better economies of scale and are more fuel efficient and flooding the market with capacity that leads to an inevitable decay in rates with supply outstripping demand. This has led to the periodic removal of capacity to try and re-build rates and subsequent sharp increases in rates and unavailability of space on vessels when required.

Effectively, any alliance that enables shipping lines to plan capacity and help them manage their fleets, keep services consistent and apply rates to make a return, has to be a positive step. Without this there could be a repeat of 2010 when shipping lines tore up agreed fixed rates contracts following unsustainable losses – most famously Maersk increasing Argos rates on Jan 15 2010 from USD 930.00 to USD 2730.00 per 40’ container. Maersk posted a loss of USD 2.09BN for 2009 however returned to profit in 2010.  Most container shipping lines have been losing money year on year since the downturn in 2009.

The consolidation of these shipping lines has to be better than the alternative; struggling independently and exiting markets, leaving only a few carriers with the market place to themselves. A buoyant global economy depends on goods and services being freely available from a variety of providers – something competition commissions are trying to protect. Hanjin Shipping has just announced they are exiting the Asia-Black Sea and Trans-Atlantic markets and the Malaysian carrier MISC left the container shipping market entirely at the end of 2011, leaving less competition and service options in the market place.

Managing inventory is a key part of any organisation’s success and without regular, reliable services businesses will be caught between overstocking to avoid letting customers down or facing stock outages because the flow of inventory to/from the DC is disrupted due to blanked (cancelled) sailings and no other viable options available to cover the gap.

Consolidation through the P3 Network will bring a new world for shipping and the related industries it will impact; stability of supply, simplification and streamlining processes are just some of the long-term benefits. However, in the shorter-term there is a strong chance that the market could be more unsettled. How can manufacturers respond to the challenges within this new market place? Ensure you have built flexibility into your commercial strategies when dealing with freight forwarders and shipping lines, such as dual sourcing, for example, reviews of route and method to market and choice of market specialist to carry the goods.

This is also the time to review commercial terms, duty spend and to carry out an internal process review to include purchase order and vendor management as well as validating vessel exchange rates against the shipping line used. Of course these need to be mapped out against your organisation’s priorities – is a fixed rate option most important for you or is capacity more likely to safeguard continuity in your supply chain?

With over 1,400 UK freight forwarders re-selling shipping line services it has become more important than ever for businesses to fully understand the physical movement of their goods and have a clear commercial strategy to deal with the market. This empowerment helps identify the lowest rates in the market and to increase service levels to their customer base when delivering on time is critical. Ensuring you are investing the time and resource to maintain visibility across your transport providers is therefore key to both competitive edge and strategic growth.

For more advice on the forthcoming P3 Network, the wider impact of further consolidation in the market and how it could affect your business, please visit http://www.the-consultancy.co.uk/.

adam FraserAdam Fraser

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