Month: October 2019

British logistics giant Wincanton has entered the race to buy iconic U.K. trucking firm Eddie Stobart.

Although no formal offer has been made by Wincanton, it said in a statement it was “undertaking a diligence exercise on Eddie Stobart and its assets.”

No value has been put on the potential deal and a spokesperson for Wincanton was unable to provide any further details when contacted by FreightWaves.

Wincanton now has until 5:00 p.m. on 15 November to make a bid.

In a separate statement, Eddie Stobart confirmed it had granted its competitor “due diligence access” ahead of a possible merger.

“No proposal has been made by Wincanton to Eddie Stobart as to the terms of any potential offer, and there can be no certainty that any offer will be made to Eddie Stobart shareholders,” said the statement.

Eddie Stobart, which operates about 2,500 trucks, is named after its Cumbrian founder and is famed for its iconic green and red truck branding.

Any deal to buy the company will need to be voted on by its embattled shareholders. As reported in FreightWaves, in August the haulage company announced its CEO Alex Laffey had quit after accounting errors were found in its earnings estimates.

Shares in AIM-listed Eddie Stobart were subsequently suspended in September and the company warned that its annual results would be “significantly below” expectations after a poor first half of the year.

DBAY Advisors, which already holds a 10% stake, is another potential buyer after making a “preliminary expression of interest” in the firm in early September. The company now has until 5:00 p.m. on October 28 to signal its intentions.

“Discussions with DBAY regarding a possible offer for the company remain ongoing,” said an Eddie Stobart statement.

However, TVFB, headed by Andrew Tinkler, former boss of Stobart Group, informed the London Stock Exchange earlier this week it had made a “No Intention to Bid Statement.”

TVFB had been given a “put up or shut up” (PUSU) deadline of 5:00 p.m., October 16 to make a move.

Until 2014 Eddie Stobart was part of Stobart Group, now its biggest shareholder with an 11.8% stake.
More FreightWaves articles by Mike

At the 3PL & Supply Chain Summit in Brussels, Thomas Stroo, the head of logistics at meal-kit delivery startup HelloFresh, highlighted the company’s success in creating a lean and centralized supply chain that can be micro-controlled from the farmhouse to the consumer’s doorstep. 

A German-based company, HelloFresh is the market leader in several countries and delivers over 80 million meals per month. In the Benelux region, HelloFresh runs 600 refrigerated vans that cover roughly 450,000 kilometers every week to deliver all the boxes. 

“We want to change the way people eat because we believe that everyone deserves natural, delicious and healthy meals. We want to make people great chefs, as food brings people together and great food lets us enjoy every bit of life,” said Stroo. “We remove all barriers to eating fresh and high-quality meals at home. People don’t need to plan, don’t need to shop, but still can make great meals from scratch themselves.”

The equation of a food supply chain is quite simple – produce from the farm has to make its way to consumers’ tables. But in reality, food logistics can be a labyrinth, as it is comprised of several intermediaries who control the flow of products in the value chain. This causes needless delays, leading to food waste – especially products that have a short shelf life. 

With HelloFresh, the supply chain is cyclical as it starts and ends with the customer. HelloFresh patrons go to their online dashboard and choose the dishes they want to cook for the week, after which the company moves to source ingredients from its producers. “Once we source all the ingredients, we put them in boxes, and we deliver it. It’s a faster and fresher supply chain, and there is little to no food waste in the entire supply chain,” said Stroo. 

HelloFresh uses connected fleets for its last-mile delivery, which unlike regular e-commerce deliveries, have to be expedited and delivered across precise time windows. Connected fleets provide HelloFresh with full visibility into last-mile movement, which can be relayed to the customers via track-and-trace notifications. 

Gathering last-mile data from hundreds of thousands of deliveries has helped HelloFresh fine-tune its routing algorithms to even reflect on the time needed for a delivery stop, based on several parameters like traffic conditions, locality and availability of parking spots. “For instance, if you have a big house where parking is easy, then the driver needs less stop time. But if it’s in the center of Brussels, the driver will need to find parking spots,” said Stroo. 

A seamless supply chain also involves taking care of and making the lives of drivers more comfortable. Drivers are provided hand-held devices that they can use to click pictures if something goes wrong – like an accident on the street. The devices and their underlying software were carefully designed for drivers, with the company conducting workshops and forming focus groups to help drivers integrate better with the system. 

The in-route visibility helps HelloFresh to check on driving behavior like speeding, idling and even instances when drivers maneuver backwards every time they turn on the engine. The temperature within the refrigerated box is monitored to make sure it sustains a steady temperature of 0-4 degree Celsius (32-39 degrees Fahrenheit) as it is critical to food safety standards. 

HelloFresh does intensive research on the delivery time windows it offers, which are set in place based on inputs from its customers. For instance, a 6:00 p.m. slot was introduced recently after HelloFresh understood that a certain percentage of its customer base was hoping to cook dinner on the same day they receive their box. A 6:00 p.m. delivery slot meant that people could receive the meal kit after they get home from work and prepare their dinner on time. 

“We want to make sure our capacity and volume management is as lean as possible as it will have an effect on our drivers and our asset utilization. We are focusing on our footprint as well. HelloFresh already has 51 street scooters and electric vans driving in the Benelux, but we aim to have more than 50% of our deliveries to be e-deliveries within the next two years,” said Stroo. 

Calls for mandatory slow steaming and new marine fuel oil taxes to cut shipping’s carbon footprint are gathering steam. But so too, it seems, might be the ships – and, if so, the catalyst will be the introduction of environmentally friendly, low-sulfur IMO 2020 fuels, according to one box shipping analyst.

French President Emmanuel Macron recently called for mandated slow steaming and, earlier this week, one of his ministers called on the European Union to tax shipping bunkers. Yet new research from Alphaliner claims some container vessels could soon speed up as operators seek marginal gains on vessel speeds through fuel pricing plays.

The container shipping consultant believes the fitting of scrubbers on container ships to abate sulfur emissions and avoid using the low-sulfur IMO 2020 fuel that becomes mandatory Jan. 1 could induce some lines to offer faster services.

“Carriers that deploy scrubber-fitted ships could take advantage of cheaper bunker prices in 2020 and speed up services,” argued Alphaliner in its latest report.

The price of the heavy fuel oil currently in wide use in shipping is forecast to be heavily discounted from the end of this year because ships that are not fitted with scrubbers — the vast majority — have to switch to the more expensive 0.5% very-low-sulphur fuel oil (VLSFO) that complies with IMO 2020 regulations.

With heavy fuel oil currently available in forward markets at prices of less than $300 per ton — around $200 per ton lower than current prices for VLSFO — Alphaliner believes container lines with scrubber-fitted vessels could take advantage of the bunker price differential.

The number of containerships fitted with scrubbers reached 142 units with combined capacity of 1.14 million TEUs on Oct. 15, with a long line of ships currently being retrofitted or waiting to enter yards for retrofitting over the coming months.

“By January 2020, the headcount of scrubber-fitted containerships is expected to reach more than 260 vessels for a total capacity of over 2.30 million TEU,” said the analyst.

“This number represents some 10% of the global container ship fleet in capacity terms and it will continue to rise in 2020.”

Alphaliner expects overall capacity of the “scrubber-fitted world fleet” to hit 5 million TEUs by the end of 2020, creating more opportunities for lines to accelerate services assuming, of course, that bunker price differentials still offer an advantage to those with scrubber-fitted fleets.

“The 2M partners, Maersk and MSC, will have more than 35 scrubber-fitted ships of over 18,000 TEU by January 2020, with all 62 of their megamax vessels of capacity 18,000-23,600 TEU expected to be equipped with scrubbers by 2021,” it reported.

“This will allow the carriers to run some six Asia-Europe strings at higher speeds than currently, giving them a competitive edge over their rivals.

“Maersk and MSC are expected to operate a combined fleet of over 350 ships that will be equipped with scrubbers across all size segments by 2021,” Alphaliner said.

Of the other carriers, the OCEAN Alliance partners will have 20 scrubber-fitted units of 15,000-21,000 TEUs by January. These ships will, however, initially operate on mixed loops alongside conventional megamax units that are not equipped with scrubbers, according to Alphaliner.

Of the carriers in THE Alliance, Hapag-Lloyd has so far confirmed orders for 20 scrubber-fitted units, while Yang Ming will have 30 units. THE Alliance’s scrubber-equipped fleet will be boosted in April next year when HMM joins, adding its fleet of 53 scrubber-fitted ships, including 12 23,600-TEU newbuilds to be delivered from the second quarter of 2020, as well as a further eight new ships of 15,000 TEUs due in 2021. 

More FreightWaves articles by Mike

The idea of leveraging operational visibility across the manufacturing floor for process optimization has pushed companies to invest in Industry 4.0 — a consequence of the fourth industrial revolution — ushering automation and facilitating seamless exchange of data. 

To date, manufacturing processes largely work in silos, with individual sections having no connection with the other, bringing in gaping inefficiencies that could be solved by interaction and visualization of processes at large. 

Continental, one of the world’s largest automotive parts manufacturers, is looking to transition to Industry 4.0, by partnering with software giant SAP to standardize its air spring manufacturing processes and gain real-time visibility into operations. FreightWaves spoke with Hendrik Neumann, project manager at Continental, and Antonio Porras Martinez, machine connection expert at Continental, to discuss the company’s association with SAP software.

Neumann pointed out that Continental has been using SAP’s enterprise resource planning (ERP) for two decades, but is now branching out to use SAP’s ME (manufacturing execution) — the cornerstone of the company’s Industry 4.0 initiative. 

“There are two reasons for us to go with SAP ME. One, we wanted a software company to take control of the development of the Industry 4.0 system, and two, it is easy to integrate the interfaces between SAP ERP and SAP ME,” said Neumann. “Our goal is to standardize processes and have them rolled out across all our production plants.”

The implementation process started small, with just a single machine in a production area of a plant in Germany. Upon its success, Continental eventually integrated the solutions into four other global facilities, improving operational visibility while increasing reliability and product traceability using the Internet of Things (IoT) technology. 

For a long time, Continental had been juggling the use of different software across its several business units, making it hard for integration between production centres. Neumann explained that introducing SAP ME helped as it came with prebuilt processes, enabling faster product rollouts. 

“Standardization has led to faster rollout in plants and SAP ME integration with ERP helps us with visualization and traceability. If you can visualize the production process in real time, you can react on problems in the production process in real time,” said Neumann. “For example, the old software we had would collect data from everyone and give us the data the next day. But with SAP ME, we have live data coming in, helping us react faster.”

Implementing smart factory techniques requires unlimited networking of all production machines and systems, contended Martinez. “We are about to start projects in the area of machine learning and big data, and we expect significant benefits in the field of predictive quality and process optimization. By integrating the production-related machines, we create a high level of process flow safety as well,” he said. 

Continental now leverages IoT to identify various air spring manufacturing objects using RFID devices. Using SAP ME, the company has switched its production process from batch production to serialized production, making it easier to gather data arising from every individual product. 

“In the old manufacturing execution systems world, we needed a lot of help from developers. And if we had customer demand, we had to program product labels, which took a considerable amount of time,” said Neumann. “But now, it is easy to react to the demand because the labeling software is easy and can be done in a couple of hours, which took a couple of weeks prior to this.”

Amid the chaos predicted if the U.K. departs the European Union (EU) on October 31 without a trade or customs deal, Europe’s truckers and their cargoes will be on Brexit’s frontline, facing a range of heightened dangers. There is growing evidence that not enough is being done to mitigate the risks.

A new report from Britain’s National Audit Office (NAO) published on October 16 highlighted that criminals could view any Brexit supply chain chaos as an opportunity, leaving trucks and shipments – already targets for people and drug smugglers operating on the English Channel – further exposed.

“The main thing is that drivers need to make sure they keep themselves safe,” Duncan Buchanan, policy director at Road Haulage Association, a U.K.-based trucking representative body, told FreightWaves.

“We’re in a situation now that 40, 50, 100 miles away from the main exit points of the EU there are migrants trying to get into vehicles. It’s a serious problem. It hasn’t gone away; in fact there has been an increase because the smugglers have been saying Britain is going to be ‘closed’ after October 31.

“So, our advice – the number one priority – is that drivers keep themselves safe.”

Mitigating risks

The NAO report – The UK border: preparedness for EU exit October 2019 – found that while the most significant Brexit challenge is the lack of “business readiness,” additional challenges include “monitoring and responding to any disruption that may ensue” and “mitigating risks of the border becoming vulnerable to fraud, smuggling or other criminal activity, and activating civil contingency plans” where necessary.

The NAO publication comes after the U.K. government admitted a no-deal Brexit from the EU could see truck flows on English Channel tunnel and ferry routes cut to just 50% of current levels for three months, while truck drivers could also face delays of up to 2.5 days before crossing into France. 

Such is the confusion and complexity of Brexit, many shippers have already started to reduce U.K. exposure by transferring distribution and storage capacity to new locations in continental Europe, a trend reshaping the European logistics landscape.

Buchanan said that, post-Brexit, truckers should only attempt to cross the border with complete paperwork from the import or exporter. “If you cannot get across the border, do not carry the goods,” he added.

“That’s the safest way of [avoiding] queues which make the driver, the cargo and the lorry vulnerable.”

Border security

Still, there are also concerns about the preparedness of border security. Since April, funding has been allocated for “up to 1,000” additional U.K. Border Force staff, including around 250 personnel to support the increase in transit checks, according to the NAO report.

However, it is unclear how many have been trained and are in place. Border Force, the law enforcement arm responsible for immigration and customs, refused to comment when asked by FreightWaves how it planned to guard against criminals taking advantage of supply chain chaos.

Preparations in continental Europe are also struggling to keep up with the political negotiations. A Dutch Customs officer told FreightWaves last week that a no-deal Brexit would overnight turn the U.K. from an EU country into a “normal third country,” meaning that all goods and people movements would be subject to customs checks and formalities.

Asked if any special preparations had been made for an upturn in, for example, drug smuggling, he said, “There are no special measures at this moment,” adding that Dutch Customs is unable to coordinate policies with its British counterparts until after a Brexit deal has been struck.

He said 750 extra officers were now in place out of 1,000 that will be recruited to deal with the increased workload associated with Brexit.

Mountainous workload

The scale of the challenge facing customs and police authorities guarding the new border between the U.K. and EU was laid bare by the NAO report, which found that last year 228.5 million tons crossed the border.

To prevent smuggling of contraband, the Dutch Customs officer said detailed trade profiles would be constructed over time, gradually helping the targeting of high-risk shippers and shipments based on data and experience.

At the moment, he added, because the U.K. is part of the EU, trade between the two parties lacks visibility, so “we have no idea what’s coming from the U.K. because we don’t check.”

He added, “So for customs, its experience, we have to wait. Maybe in two years I can tell you clearly what the risks are. But at this moment it’s very hard.”

He said the last time smuggling prevention policies were in place for the U.K. – “back in the 90s” – items most likely to be smuggled were “leather coats” and “antiques.”

HM Revenue & Customs (HMRC) expects it will need to process 270 million declarations each year if Britain leaves the EU without a deal, compared with current volumes of 55 million.

HMRC also expects 150,000-250,000 traders will need to make a declaration for the first time in the event of no deal in just over two weeks, of which only approximately 25,000 had registered for Transitional Simplified Procedures as of October 8

Paperwork overload

Buchanan said the scale of the paperwork changes Brexit entails means it is “absolutely impossible for everyone to be fully compliant given the volume of trade.”

He anticipates traders “making lots of mistakes” due to the lack of a transitional period.

“We are getting new information from governments all of the time – we are trying to seek clarity from authorities in Europe and we’re not getting it,” he added.

Pauline Bastidon, Head of European and Global Policy at the U.K.-based Freight Transport Association (FTA), said the NAO report highlights the scale of the challenge for industry.

“It echoes FTA’s messages to government about structural issues that are slowing down preparedness, such as the shortage of customs brokers able to support industry in complying with new customs formalities or the lack of clarity on operational details – not least in relation to how the Irish border would be managed by the Irish Government in a no-deal situation,” she added.

“The situation is particularly challenging for U.K. exports to the continent and Ireland – especially for agri-food products, where a shortage of veterinarians able to sign export certificates is to be feared.”

Bastidon also said, “In spite of the industry’s best efforts, delays and disruptions cannot be and should not be excluded, at a time when logistics and supply chain managers are less able to mitigate disruptions due to high demand for transport and warehousing capacity ahead of the Christmas period.”

More FreightWaves articles by Mike

At the 3PL & Supply Chain Summit in Brussels, Sander Breugelmans, vice president at logistics real estate major Prologis, spoke on the need for businesses to nurture a fresh perspective towards retaining their warehousing workforce when faced with a market grappling with labor shortage. 

Breugelmans started by highlighting the conversations Prologis has with its customers to understand the fundamental reasons why they choose specific locations for their warehousing space and the various pain points they face in their business. “One of the topics that has come back again and again is the issue of retaining high-quality labor,” he said. 

Figuring out a way to retain a skilled workforce is critical to the functioning of a warehouse because those workers makes up a considerable portion of its operating costs. This requires businesses to be wary of their labor turnover rates, as a constant hunt for new talent will strain their already strained budgets. 

Recently, Prologis joined Eye for Transport to conduct a survey with 206 warehouse businesses, which revealed that labor scarcity and the perennial need for retaining workers to be the primary drivers for decision-making. 

“What we found is that 85% of all the people that work in distribution centers live within a 30-kilometer radius of the warehouse. That’s important as it explains why relocation in a very tight labor market like today is not an option for many companies,” said Breugelmans. “If you relocate, you run a very high risk of losing your employees, and trying to get new employees in the labor market can be very difficult.” 

As a corollary to this observation, businesses are increasingly looking to move their warehousing operations closer to densely populated areas because that will give them an edge in recruiting and retaining skilled employees. 

“Prologis is very focused on developing properties that are very well located and easily accessible, both by car and by public transportation. If public transportation is not there, we try to work with local municipalities and transit authorities to get public transport close to our buildings,” said Breugelmans. 

The space within the warehouse is also being improved. Prologis is developing spaces that can maintain good lighting and air quality within the premises, while also ensuring the environment is aesthetically pleasing to the workers. 

“Lights make a huge difference in the perception that people have of space and whether or not they feel pleasant working in that space. We also found that incorporating plants really creates a feeling that people have when they are at home,” said Breugelmans. “We also work on making our warehouses sustainable by using solar panels and by trying to minimize our carbon footprint.”

Prologis has also been experimenting with ridesharing across Central and Eastern Europe and has set up websites and apps where people can sign up and share cars together. “We found that when people share rides, it is sustainable and saves money. It also creates a sense of community, which is key when it comes to labor retention,” said Breugelmans. To foster a sense of belonging, Prologis builds restaurants, parks and even football fields in the warehousing vicinity, to help the workforce gel well after work. 

To increase the pool of skilled labor, Prologis works with municipalities and education centers to effectively train people and get them initiated into a career within the logistics space. “Once municipalities identify people in labor markets, we invest in education centers to get them the right training. This gives our customers access to a bigger workforce and also helps the communities in which these people work and live,” said Breugelmans.

Shippers are rapidly relocating distribution and storage capacity to continental Europe ahead of the U.K.’s expected exit from the European Union (EU).

Britain is scheduled to ‘Brexit’ the EU with no deal on 31 October although multiple outcomes are still possible. However, as reported in FreightWaves, even if a no-deal Brexit is somehow avoided this month, the U.K.’s anticipated eventual departure is already reshaping the European logistics landscape.

Anecdotal evidence that this trend is in full flight was readily available on a fact-finding logistics tour of the Netherlands by FreightWaves last week.

Cuno Vat, CEO of Neele-Vat Logistics, a Netherlands-based logistics provider, said that while the uncertainty around Brexit had been confusing for business, new opportunities have emerged.

“We’ve seen a five-fold increase in requests from overseas companies currently with setups in the U.K. that want to redesign their supply chain. They are considering the Netherlands as a location and want us to be their business partners,” he said.

Vat explained that during the 1980s and 1990s many companies from North America and Asia established European bases in Britain to benefit from the advantages of English as a first language, openness to immigrants, a reliable legal system and relatively low taxes. Yet with Brexit threatening labor shortages, customs checks and other transactional costs, many have changed tack and are now looking to continental Europe for safe haven.

For some manufacturers, in the food industry for example, this is a short-term risk management play – they are building up temporary inventory on both sides of the English Channel to guard against short-term Brexit logistics chaos. However, others are making substantial, long-term commitments to shifting large parts of their businesses out of the U.K.

“Some companies only need temporary storage around the Brexit deadline in October, as they did in late March, the previous Brexit deadline,” said Vat. “We make money on this business, but we know it won’t last.

“Others are relocating from the U.K. to continental Europe; here [The Netherlands] and to other places. An enormous amount of new warehousing has been built and that demand has been picked up.”

He was not alone in noting that many shippers are already transferring storage and distribution networks out of the U.K. in anticipation of increased transactional costs at the U.K. border.

Stan de Caluwe, senior supply chain solutions manager of the Holland International Distribution Council (HIDC), told FreightWaves his organization was in talks “with various logistics companies at the moment” about moving from the U.K. to the Netherlands, transfers HIDC helps to facilitate.

“Many are starting with additional solutions such as a second hub here and one in the U.K., then longer term are looking to move their European distribution center here and will then service the U.K. from here.”

De Caluwe said that as the center of gravity in Europe shifts eastwards post-Brexit, this will drive demand for storage and distribution capacity not only in the Netherlands, but also in western Germany and Belgium.

He takes the view that “the main entry points will still be in the west of Europe,” especially via the port of Rotterdam and Amsterdam Airport Schiphol, which will ensure the Netherlands maintains its prized “gateway” status.

He said interest in transferring operations was particularly enthusiastic among the financial technology, health, life science and health sectors. “Many have licensing issues if they aren’t located in the European Union when Brexit happens,” he added. “So those companies are in a hurry.”

Jorn Douwstra, business manager for international trade and investment at Rotterdam Partners, also confirmed the trend, noting that financial and insurance companies had already moved to the Rotterdam area to avoid licensing issues.

“We think that a lot of multinationals already have a plan to move,” he said. “A lot of small businesses in the U.K. don’t know what to do and are waiting until there’s a final decision on Brexit. And we see a lot of mid-size companies trying to make up their minds.”

Douwstra continued, “If they have a large market share in mainland Europe instead of the U.K., then for a lot of companies it’s beneficial to try to open a warehouse here to serve those clients, especially if they ship goods from outside the EU because you don’t want to have dual tariffs.”

Michiel Bakhuizen, strategic adviser for the Netherlands Foreign Investment Agency (organizers of the fact-finding tour), believes many companies are keeping their options open but if a no-deal Brexit proceeds, they will be ready to move after a relatively short interim period.

“They really want to be sure that a no-deal Brexit is definite before investing the amounts of money needed to move over to the Netherlands,” he added.

More FreightWaves articles by Mike

https://www.freightwaves.com/news/author/mikeking

With container line stakeholders facing an additional $11 billion fuel bill next year due to the switch to low-sulfur fuel oil, shipping consultant Drewry has joined with the European Shippers’ Council (ESC) to launch a new bunker adjustment factor (BAF) indexing mechanism.

The two parties believe their simplified BAF indexing mechanism and bunker charge guide will help shippers monitor and control bunker costs as shipping lines switch to the more expensive bunkers required under the IMO 2020 low-sulfur regulation that becomes mandatory Jan. 1.

As reported in FreightWaves, “bewildered” shippers and forwarders have expressed confusion over the timing and transparency of new charges now being introduced by container lines as they phase in low-sulfur IMO 2020 compliant fuels and pass on higher costs to customers.

Shippers are also wary that container lines might hike the fuel component of freight to compensate for bearish spot rates.

For their part, carriers have insisted they will only charge for the “extra cost of compliance” as they phase in the new fuels.

ESC and Drewry drew on shipper input in establishing their new indexing mechanism. The process of adjusting BAFs is streamlined by identifying common standards and definitions for bunker price measurement periods, BAF adjustment periods, fuel reference prices and transparent indexing formulae.

“By giving to shippers the possibility to better analyze present and future types of fuel costs, this toolkit is representing a significant step towards a more transparent framework for the best interests of all parties,” said Jordi Espín, maritime policy manager at ESC.

Step one of the process sees the shipper and the provider agree on the “baseline” initial bunker charges and the link to the baseline external fuel price at the start of the contract. For the period of the contract, revised bunker charges are calculated based on the previous quarter’s average price. They are then applied contractually to the following quarter with no need for negotiation.

“BAF charges are updated once a quarter with a lag time of one month to allow parties to update their respective invoicing and purchasing systems,” said a statement.

“Consideration is given to an additional ‘interim’ BAF adjustment to address the risk of huge volatility in the early prices of the new fuel.”

The indexing mechanism tracks and applies the change seen in any relevant bunker price index — global, basket of regional or regional — as compiled and published by any neutral third party, including Drewry.

Philip Damas, head of Drewry Supply Chain Advisors, claimed the ESC-Drewry IMO 2020 toolkit and its indexing mechanism would help improve transparency and fairness in how extra fuel costs incurred by shipping lines and forwarders due to the new regulation were passed on to exporters and importers.

More FreightWaves articles by Mike

Maritime carriers are leaving up to US$110 on the table every time they carry a box, according to research from startup MizzenIT. And that means ocean carriers could be missing out on hundreds of millions of dollars a year by not charging the right price. 

Glenn Butcher is a venture capitalist and the chairman of MizzenIT. He told FreightWaves that if the number of TEUs shipped on the spot market was multiplied by US$110, then “it’s a very large number. It’s indicative of the opportunity,” he said. 

Butcher added he was “surprised at the bottom-line impact. No fundamental change is required. New ships aren’t required. It all flows through to the bottom line.”

Ocean container shipping companies miss out on generating hundreds of millions of revenue dollars each year

No one appears to know exactly how big the world container trade is by box volume, which is expressed in twenty-foot equivalent units (TEUs). But, to put the scale of the discovery into context, we do know from recent reporting that China alone reported 127 million TEUs in port throughput in the first half of 2019. Meanwhile, the top 25 ports in the U.S. handled 51.1 million TEUs in 2017.

We can get a better idea of the context by looking at the accounts of a large ocean container shipping company such as Hapag Lloyd. The liner company carried just under 11.9 million TEU in 2018. Digging into the 2018 accounts reveals that Hapag Lloyd directly earned EUR 10.5 billion (US$11.6 billion) from the transport of ocean shipping containers.

Assuming 30% of its boxes are carried on the spot rather than the contract market means that just under 3.6 million of the total boxes carried had variable rates. Assume further that Hapag Lloyd missed out on US$110 on each of those spot market boxes. 

That’s roughly an extra US$391.8 million that the company (theoretically) has left on the table. 

A pretty good boost to profit

There’s a lot of assumptions there, but it does give an indication of the potential size of the opportunity. And, while the extra monies raised would be written into the account books as revenue, as there are no extra costs associated or incurred in generating that revenue it would immediately boost profits.

Hapag generated US$1.35 billion in earnings before interest taxation and depreciation in 2018. The money left on the table would boost EBITDA to just over US$1.74 billion. 

That’s a 29% increase. 

It’s a pretty good boost to profit for simply charging a more market-calibrated price. 

Frustrated with stagnant prices

MizzenIT founder and managing director Jon Charles, a former ocean container line trade manager, explained the origin of his search for liner shipping’s lost opportunities.

“Anecdotally, and because of my background, I knew there was a disconnect. … Back in my time as a trade lane manager, we had all this cargo backlog on the wharf. But prices didn’t rise! I was frustrated,” Charles told FreightWaves in an interview.

This massive opportunity cost of US$110 per TEU shipped is being incurred because of outdated practices used by the international ocean shipping industry. Charles elaborated on why ocean shipping companies have not exploited this revenue opportunity.

Supply, demand and price disconnect

In a written statement, he explained that ocean shipping prices are set by date and not by ship’s voyage. As any slot on any vessel can be booked by date, regardless of whether the ship is empty or full, there “is a disconnect between price, supply and demand.”

Secondly, there is little in the way of “market-wide” data on cargo demand, shipping capacity and price, which means that prices are set based on a shipping company’s internal data. While he acknowledged that various consultants and other parties have tried to create freight rate transparency, these tend to be focused on one trade lane. 

Charles queries, for instance, how one trade lane on the Shanghai Containerized Freight Index, which gives freight rate information for the Shanghai-Melbourne port pair for a 20-foot box, can be representative of the whole of Oceania.

Current pricing is just a “best estimate”

Charles pointed out that the SCFI doesn’t give details for other port pairs or container types, such as, say, for a 40-foot high cube from Wenzhou, China, to Sydney.

“Pricing is a best estimate only and [is] not driven by broader, real-time data, which, until now, has only been available weeks after the given trading period,” Charles noted.

Finally, Charles argues, shipping lines offer limited product choices. He pointed out that customers can take the spot price but then forgo booking certainty in the peak season. Or, alternatively, they can contract but then forgo the price flexibility of the spot.

“These factors all combine to lower efficiency, and ultimately, profitability,” Charles wrote.

Methodology… how to find all the missing money

MizzenIT set out to discover just the size of the opportunity cost. After receiving a federal government grant from the APRIntern programme, Charles got in touch with the Centre for Artificial Intelligence at the University of Technology Sydney (UTS) in Australia. Associate Professor Farookh Khadeer Hussain and PhD candidate Ayesha Ubaid worked to model the interactions between the Australia-Asia container trade lane, shipping capacity and TEU volumes. They used artificial intelligence to develop a price-prediction system.

MizzenIT modeled weekly shipping capacity using actual vessel-in-trade data. Cargo demand was also modeled. Data sources included port authority data, the SeaIntel TCO report, the Shanghai Containerized Freight Index (Australia/New Zealand route) and MizzenIT’s own price database.

Next step: just how much revenue are ocean carriers not catching?

The next step was to figure out the opportunity cost.

“The opportunity cost is deemed as the variance between the SCFI price and calculated optimal price multiplied by the percentage of cargo carried on the spot market and therefore open to the levied optimal price.

The assumption taken was 30% of cargo carried on the Asia/Australia trade could be charged at the optimal price each week,” Charles wrote.

That allowed MizzenIT to discover the hidden price gap in ocean container shipping, which, in 2018, was US$110 per TEU.

“I knew it was going to be significant,” Charles told FreightWaves. He added, “It reinforced what we are going to do as MizzenIT.”

Digitalization will transform ocean shipping

MizzenIT was set up to help bring transparency to the shipping market by providing dynamic pricing and rates information. Both Charles and Butcher see MizzenIT as being at the forefront of a transformative digitalization of the shipping industry.

They gave examples of how digitalization can help improve the ocean shipping industry. For instance, Butcher and Charles said that five of the top 12 ocean carriers won’t let a potential customer instigate a rate inquiry or quote from their homepages. 

They also pointed out that ocean carriers in Australia operate out of Melbourne and Sydney on the east coast but that a lot of customers operate out of Perth on the west coast. There’s a time zone difference of about four hours. It’s a bit like, say, the time and distance difference between Los Angeles, California, and Jacksonville, Florida.

Potential liner shipping customers “make a pricing request but no one answers the phone as carriers have gone home,” Charles said.

Shipping is focused on efficiency and not revenue growth

When FreightWaves asked why, in today’s world, not all of the main shipping companies offer live quotes and do not run 24-7 booking operations, Butcher said that the shipping industry has been focused on efficiencies and not on growing revenues.

“Cost is controllable,” Butcher said.

Charles also argued that shipping companies have tended to look at digitalization as an information technology project.

“IT is about cost saving. Digitalization is about revenue streams. Too many look at digitalization as an IT project. There’s a shift in mentality though. People are bringing in outside expertise. We met our first chief digital officer in Singapore a few years ago. There are a few leaders — Maersk, CMA CGM and so on,” Charles said.

About MizzenIT

MizzenIT helps shippers, forwarders and carriers tackle these problems through its digital platform. Interested shippers and forwarders can hop onto the MizzenIT platform and search ocean schedules, get live shipping line quotes and book. Carriers provide pricing and rules around pricing; meanwhile, MizzenIT automates quotes on behalf of the carrier.

For instance, interested parties can get more than 100 instant southbound port-pair rates from ocean shipping carrier ANL. The company works with a variety of ocean carriers including APL, CMA CGM, Evergreen, Hapag-Lloyd, Hamburg Süd, HMM, Maersk, MSC and OOCL.

MizzenIT was set up in late 2016. Neither revenues nor profits of the company are disclosed, although FreightWaves was told that the company has 120 freight forwarders as customers in Australia along with some mid-tier multinationals and small to midsize enterprises.

“We want to change the world”

It’s still very much early days for MizzenIT. So far the founding groups and high net worth individuals have chipped into the seed funding of MizzenIT. There are no concrete plans for an investment roadshow and there is no institutional money in MizzenIT — “not yet. But we are open to it,” Butcher said.

FreightWaves quizzed Butcher and Charles on the end game for MizzenIT, such as a trade sale or an IPO. 

“There’s lots of goals and options. Nothing is ruled out. We’re driven by a desire to change the industry. We want to change the world,” Butcher told FreightWaves. 

Spot rate losses by carriers are self-inflicted and will undermine annual Asia-Europe contract negotiations with shippers later this quarter, believes one leading analyst.

Entering the fourth quarter, it was clear that the introduction of new IMO 2020 low-sulfur fuels, a rise in oil prices following drone attacks on Saudi oil fields and the ongoing U.S.-China trade war would prove disruptive, with carriers expected to continue their strategy of heavy blanked sailings to prop up rates during the traditional slack season.

However, analysis by Drewry claims some lines, certainly on Asia-North Europe trades, have misjudged the market this year, undermining their own efforts to generate profits. It points to ample evidence that carrier rate cutting has resulted in them missing out on the benefits of stronger than expected demand growth.

“The disconnect between supply and demand fundamentals and freight rates is indicative of a return to predatory pricing on the part of some carriers within the trade, undermining the positive demand story,” said the analyst in a note.

“Unless lines match pricing discipline to that shown for capacity it will be for nothing.”

Drewry’s case is persuasive. Westbound demand on the Asia-North Europe container trade has exceeded expectations this year, a trend that should have helped to counteract the influx of big new ships and maintained load factors at roughly the same levels as last year, in the mid-80% range.

Headhaul demand on Asia-North Europe trade was up by 5.9% in the first eight months of the year, according to data from CTS. This compares to the 2.9% annual growth registered last year.

“The trade appears to be benefiting from trade diversion related to the U.S.-China trade war, with Chinese exporters looking to Europe to fill the shortfall of U.S. traffic,” noted Drewry.

Even though growth has slowed in the second half of the year, westbound volumes still expanded by 3.4% and 3.8% in July and August, respectively, and Drewry believes lines enjoyed 12-month rolling growth rates of nearly 6% through August.

However, despite the positives, spot market freight rates have not recovered from a first-quarter slump and are currently tracking at their lowest levels this year. The Freightos Baltic China/East Asia to North Europe 40-foot container index dropped 1.15% in the week to Oct. 13, for example, while the Freightos Baltic Daily Index tracking the cost to ship a box on the China-to-North Europe route (SONAR: FBXD.CNER)  is down 17% year-on-year, and the Freightos index covering the China-to-Mediterranean lane (SONAR: FBXD.CMED) is down 6% year-on-year.

More concerning for lines, a number of analysts, including Maritime Strategies International and Alphaliner, have predicted rates will slip in the coming weeks as demand tapers.

For its part, Drewry believes the demand up cycle enjoyed on the trade for much of the last 12 months is now drawing to an end. “The third-quarter peak season did not witness any rolling of containers and given the amount of capacity that is being withdrawn it would appear that the lines themselves are not expecting any cargo surge,” it said.

Drewry noted that while liner capacity retrenchment has helped westbound utilization gradually rise since February, spot market freight rates have not responded positively. “There was clearly an element of rate cutting going on and if that hasn’t been eradicated, lines are unlikely to realize the full benefit of the planned capacity reductions,” Drewry added.

With both demand and spot rates expected to be tepid in the coming weeks, lines will be at a disadvantage in Asia-Europe annual contract negotiations with shippers.

“The concern now among carriers must be that with the annual beneficial cargo owner service contract negotiations looming on the horizon, whatever gains are made in terms of higher bunker surcharges will be negated by lower ocean rates for 2020 contracts,” concluded Drewry.

The only positive? “An earlier Chinese New Year, beginning Jan. 25, might offer some assistance to contract negotiations by boosting activity in December,” said the analyst.

FreightWaves articles by Mike