From the News Desk: Cost cuts are key to container line survival
Hapag-Lloyd chief executive officer says lessons have been learned from other recent economic downturns
Shipping companies are actively cutting costs in order to stave off the worst of the financial implications of a coronavirus-led drop in demand. New initiatives to integrate digital technologies into operations could help with this process
Although under no illusion that the health crisis will have a damning impact, Mr Habben Jansen said he is “more optimistic” than his counterpart at Danish group Maersk, Søren Skou, who warned a few days prior that while the “visibility remains low” for the second quarter of the year, he expects container volumes could drop by about 25% over the three months.
Indeed, he said the more likely scenario is for a smaller, double-digit percentage drop in carried volumes.
While capacity discipline though blanked sailings have been one of the factors that have helped lines keep freight rates at a decent level and above year-ago numbers, Mr Habben Jansen said that one thing carriers have learnt from downturns in recent years has been that if you do not address your cost base quickly then you can get into “deep trouble”.
“I think we all we all know what happened in 2008-2009. And we are certainly a lot more aggressive in taking out costs now than we probably were then,” he said. “That is what we are doing, because we simply need less [ships]. The only way to survive is take out cost.”
Hapag-Lloyd saw its net result fall nearly 75% against the corresponding period of during the past year. However, the group still turned a profit thanks to both an increase in volumes and average freight rates for the quarter, which in turn lifted revenues.
Contributing to this “pretty solid first quarter” were significant measures to take costs out of the system from the get-go, according to Mr Habben Jansen. He said acting quickly should ensure the group is in good stead to weather the current headwinds.
Hapag-Lloyd, along with its alliance partners, will continue to pull capacity to suit, and although this is perhaps the most visible and substantial measure to keep costs down, Mr Habben Jansen said this is one of 1,500 currently being executed aimed at taking costs out of the system.
“Essentially, we're looking at every cost category and trying to save money everywhere,” he said. “On the one hand, that means that trying to combine services, redeliver ships, but we're also trying to see whether we can save cost on the terminal side and what we can do make our transportation more efficient.”
One initiative that could potentially save the containers industry billions of dollars per year by 2030 was announced this week by the Digital Container Shipping Association.
Formed just over a year ago by major carriers including Maersk, Hapag-Lloyd, Mediterranean Shipping Co and Ocean Network Express, the DCSA’s chief executive Thomas Bagge said it aims to develop open source standards for necessary legal terms and conditions, as well as definitions and terminology to facilitate communication among customers, container carriers, regulators, financial institutions and other industry stakeholders.
“Our mission is to drive alignment and digital standardisation to enable transparent, reliable, easy to use, secure and environmentally friendly container transportation services,” said Mr Bagge.
“Digitising documentation, starting with the bill of lading, is key to the simplification and digitisation of global trade. The transformation that has taken place in the airline industry is an example of what’s possible if we work together.”
The association estimates that even with a 50% uptake of electronic bills of lading, the sector could save as much as $4bn per year by 2030.
André Simha, head of digital and innovation at Mediterranean Shipping Co, said the pandemic is highlighting the benefits of electronic bills of lading. “Cargo in ports cannot be gated out because of paper that is stuck elsewhere due to airfreight delays caused by the pandemic,” said Mr Simha, who is also the chairman of the DCSA.
Meanwhile, a group of Chinese oil trade players, including two major tanker owners, have published a white paper on the use of blockchain applications to increase efficiency and security in the sector.
The initiative, unveiled last Friday, envisages a digital platform that incorporates all the key stakeholders in the supply chain of the energy and petroleum industry to streamline the processes involved.
China Merchants Energy Shipping and Cosco Shipping Energy Transportation, two of the world’s biggest owners of very large crude carriers, are among the co-authors.
The paper said that tanker shipping firms are in the middle of the industry’s supply chain and are required to provide more secure and transparent services. But at the same time, they have large funding needs, which can be difficult to meet using traditional tools such as corporate guarantees, vessel collateral and project financing.
“Shipping companies want to use blockchain technologies to share shipping bills, make data safe and transparent, and renovate financing methods,” the white paper said.
One practical example of this is enabling demurrage charges and other fees under contracts of affreightment to be automatically authenticated and paid for with smart contract technologies, it said.
At the same time, the paper added that this digitalised and secure information can be used for collateral loans backed by demurrage charges, sale of overdue accounts or even structural financing to “improve the efficiency of shipping companies’ use of funds”.
In addition to greater flexibility in financing arrangements, digitalised documents can also offer “a perfect solution” for tanker owners who at present cannot obtain the original bills of lading from cargo owners and have to rely on charterers’ letters of guarantee when discharging.
You can find more on the digitalisation of the shipping industry in our special section here.
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