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Industry Insight

Shifting Legacy Maritime Culture through Operational Management, Transparency, and Digital Transformation, Part 1

Shipping is one of the oldest industries around. It is the first truly global community formed through commerce and trade. For those fortunate enough to have sailed, there is a comradery amongst those who have risked life, limb, and the perils of the sea that transcends individual cultures of different passport holders. Maritime activities bring resources and goods from every corner of the world which have built our respective societies.  

However, similar to most other industries, there is significant room for improvement. Shipping is historically resistant to change, saturated with legacy paradigms and leadership, with few perceived incentives to transform, along with a lack of transparency that undermines efficiency and sustainability. These deficiencies provide tremendous opportunities for the global community to reshape the industry and thrive.

In this multi-part article, we address major underlying issues that have been identified to affect positive transformation to maritime culture and operations. We will discuss operational management, transparency, and corruption, and digital transformation. Shipping companies need to adopt a trial-and-error approach requiring changes in both mindset and management style to future-proof operations. 

Diving in.

The maritime industry’s crucial role in global commerce and national defense cannot be understated. For the industry to function, leadership and management must set the standard with transparency and fiduciary governance. Not just at the company level, but on the scale representative of the industry, acting benevolently through cooperation and collaboration.

Overall, the industry has been reluctant to change, primarily due to high barriers to entry that are largely prohibitive. These barriers include massive capital investment, intense international regulatory compliance, and sourcing highly specialized crew and shoreside support. As a result, the marine sector is a carefully orchestrated, often jumbled, symphony comprised of owners, operators, regulators, inspectors, logistics, vendors, and suppliers. Participation in the segment requires tremendous resources, usually limited to governments (or their subsidies), wealthy families, and well-capitalized entities.  

So how does the maritime industry begin to change course and become a better version of itself? The answer, of course, is leadership and prescribed management practices. Unfortunately, historically maritime management has repeatedly demonstrated that it is impulse-driven, with irrational actors incapable of long-term planning. A deficiency that plaques the entire trade where effects are felt by seafarers, investors, and the pockets of everyday consumers. Let us begin this deep dive by exploring trends in shipbuilding over the past two major economic crises; the oil collapse of 2015 and the COVID pandemic of 2019.

Industry Cycles

The maritime and oil & gas sectors often get caught in their own cyclical shortsightedness. 

For example, when oil prices hit all-time highs above $100/barrel in 2013, unprecedented amounts of new construction of mobile offshore Drilling Units (MODUs), aka oil rigs, and their supporting vessels were financed and put into service. Investors, embowed with a sense of FOMO (fear of missing out), thought those record prices were the new norm and based their financial projections at said levels. Operators, new and old, felt that they would still enjoy the bull run by the time their new assets were on station.

Within months, the stark reality of overcorrections decimated the market for years, sending oil prices down to less than half of what they were and reaching lows not seen since the great recession of 2008. Why? A litany of complex circumstances that most business managers and analysts missed. What were some of the factors?

Those included:

  1. A strong U.S. dollar which drove down oil prices –
    • The dollar typically indexes commodity prices.
  2. The Organization of Petroleum Exporting Countries (OPEC) deciding not to cut production in their 2014 meeting in Vienna –
    • This was further perpetuated by the Iran Nuclear Deal that removed Western sanctions for oil export as global production reached a staggering 9.35 million barrels per day.
  3. Weakening economies of Europe, and China –
    • China, the world’s largest oil importer devaluated its currency during this time, and it led to a sharp reduction in global demand and oversupply.

The result was felt across the industry as “soft money” couldn’t weather the financial storm and had to sell off or scrap equipment at a loss. The long-drawn-out contraction has also included the culling of incumbents, as seen by the recent exit of rig building by behemoth Keppel FELS of Singapore. Such news should serve as a warning to all in the industry.

History Repeats?

“History doesn’t repeat itself, but it often rhymes.”

                             – Mark Twain

It doesn’t seem that lessons were learned from the recent past.  Last August (2020), Peter Sand, the Chief Shipping Analyst for the Baltic & International Maritime Council (BIMCO), noted that “the demand shock from the Covid-19 crisis and expectations of a long road to recovery ahead” lead to the accelerated ship demolition, as the outlook for “the next few years has become much gloomier.” A viewpoint that echoed a mid-2020 statement by Lloyd’s List discussing how the pandemic “accelerated…a period of decline in container shipping demand growth,” as carriers were “trying to remove capacity to manage an otherwise over-tonnage situation.”

According to German broadsheet Handelsblatt, shipowners laid up 14% of the global fleet at the onset of the pandemic. At the same time, Alphaliner reported that 11 of the 12 largest container liners reduced TEU (twenty-foot equivalent units) in 2020. Maersk, by itself, had removed 55 chartered vessels. Alas, how quickly things change. The low freight rates leading up the crisis, brought on by overcapacity, which resulted in vessel scrapping, changed course and sored to all-time highs.

By mid-to late-2020, much of the fleet laid up was redeployed as operators scrambled to add capacity to well-paying China-U.S. routes. Due to America’s disproportionally acquiring facemasks, personal protective equipment (PPE), ventilators, and consumer electronics. This left Europe scrambling for capacity as rates were driven up. According to Drewry Shipping, transport rates for an FEU (forty-foot equivalent unit) from Shanghai to Rotterdam is now $10,522, a 547% higher than the seasonal average increase over the last five years. Shanghai to Los Angeles reached $5,605 per FEU. Comparatively, to showcase the monodirectional demand for capacity, it only costs $738 per FEU (often empty) from Los Angeles to Shanghai.

These conditions are reminiscent of the oil boom of 2013-14. Similarly, management’s response to the situation is to, once again, invest heavily in capacity. A capacity that will oversupply when it hits the market after several years of new construction, as most current newbuild orders on the books will not be ready until 2023-24.  

Recognition is often the first step in recovery from deficient behavior.  The industry that society relies on is fully capable of identifying areas of improvement.  But it must first provide an honest self-assessment to progress.  Please join us next week and we continue with vessel supply capacity and the cause and effect that the market is experiencing with that plus the pandemic.  As always, your comments and experiences are welcome.

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