Volatility of container ocean freight

1. The basic economics. 2. Implications for the industry 3. Predicting Demand 4. Controlling Supply 5. Options for Carriers 6. Implications for importers 7. Future Tendencies?

1. THE BASIC ECONOMICS Elasticity of Demand A measure of how much demand changes when the price of a product goes up or down.

Elasticity of Demand Determinants: 1. The availability of alternatives Rail. Airfreight Bulk. 2. Time This allows for very rapid rate increases when space is tight. Conclusion : Very Inelastic 1. THE BASIC ECONOMICS

Elasticity of Supply A measure of how much supply changes when the price of a product goes up or down. 1. THE BASIC ECONOMICS

Determinants: 1. Ease & cost of substitution. 2. Spare Capacity 3 Time needed to adjust supply Elasticity of Supply Conclusion: Very Inelastic Sector 1. THE BASIC ECONOMICS This leads to fast falling rates when there is capacity surplus

2. IMPLICATIONS FOR OUR INDUSTRY D’D S Price Quantity Price S’SD Inelastic Demand combined with Inelastic Supply A perfect recipe for VOLATILITY

Demand Shock 2. IMPLICATIONS FOR OUR INDUSTRY D’ D S Price Quantity Tight space situation (full capacity): - Inelastic Demand (lack of alternatives) - Inelastic Supply (time needed to adjust) Fast Increasing rates

Supply Shock 2. IMPLICATIONS FOR OUR INDUSTRY S’SD Price Quantity Open space situation (surplus capacity): - Inelastic Demand (if prices go down, volumes do NOT go up) - Inelastic Supply (inability to adjust capacity quickly) Fast Decreasing rates

2. IMPLICATIONS FOR OUR INDUSTRY

All we need to do is match supply with demand

Globalization of the economy - Elimination of trade barriers (WTO) - Delocalization of production to Asia - Economic growth Economic crisis that nobody saw coming - Second economic crisis in Europe 3. PREDICTING DEMAND

Will there be further delocalization of production? - Shall production shift back to Europe? - Shall production in Asia shift away from China? - What will be the economic growth in Europe? Conclusion Forecasting demand is very, very difficult Solution? We need to adjust supply

4. CONTROLLING SUPPLY (Long term) Source: Unctad.

- No consultation between carriers - Time lag between order & delivery - Minimum 8 or 9 ships per order - Increasing size of the vessels - Large number of carriers - High investment required - Decreased flexibility in deployment - Reduced life cycle of ships - Decreased flexibility to cascade - Pressure to maintain slot cost competitive Very Inelastic: Once a decision on investment is made it is final 4. CONTROLLING SUPPLY (Long term)

- Huge investment decision based on inaccurate or unreliable predictions - f.e. Lots of vessels ordered in Control of supply proved too difficult when we had the conference. - Control of supply proved too difficult when we didn’t have an economic crisis. Conclusion: It should not come as a surprise that we can’t control it right now or in the near future 4. CONTROLLING SUPPLY (Long term)

Bunker / Port ChargeVessel Charter / Admin Freight Profit Freight Saving by idling Loss 4. CONTROLLING SUPPLY (Short term) As periods of structural overcapacity seem inevitable, the only option left to carriers is to control capacity on short term, through lay-up and slow-steaming. However the idea that carriers can manipulate supply is an illusion.

Bunker / Port ChargeVessel Charter / Admin Freight Profit Freight Saving by idling Loss 4. CONTROLLING SUPPLY (Short term) Both break even point and lay-up point can vary from one carrier to the next. Break – Even Point Lay – Up Point

Both break even point and lay-up point can vary from one carrier to the next. - Vessel Size - L/F Eastbound - L/F Westbound - Charter cost /vessel cost - Sailing speed - Bunker consumption - Cargo Mix - Network cost 4. CONTROLLING SUPPLY (Short term)

All we needed to do was to match supply with demand Conclusion: Predicting Demand is very difficult Controlling Supply is very difficult Other solutions? Improve Competitiveness Reduce Elasticity between carriers Increasing Cost, Time & Perception of risk to switch

1. Improve competitiveness. - Slot cost ~ vessel size - Improve load factor - Scope of services. - Cost saving - EDI/system improvements - Customer mix 5. OPTIONS FOR CARRIERS

2. Reduce elasticity between individual carriers. What is the situation today? - No interaction between carriers whatsoever - Large number of carriers - An even larger amount of NVOCC - No carrier with a dominant market position 5. OPTIONS FOR CARRIERS

3. Increasing Cost, Time and Perception of risk A. Cost - Cost of switching is very low - Carriers will (have to) try to increase this cost (offering Value Added Services, Inland Transportation, Inland Depots, Logistics, E-commerce, Track & Trace) B. Time - The time to switch is very low - Increasing amount of long term contracts with volume commitments - Reality today: Validity becomes shorter and commitments looser

5. OPTIONS FOR CARRIERS 3. Increasing Cost, Time and Perception of risk C. Perception of risk - The perception of risk the risk of switching is very low - Increase brand differentiation (Advertizing, Calling Ports, Customer Service, Daily Cut off, Schedule Reliability)

- Importers are succeptable to high fluctuations => Difficult to plan ahead => Complicates the sourcing model => Creates tension - Fixed contract the market goes down - Floating contract the market goes up - The buy rate impacts their competitiveness (shelf price) - Space availability problems can arrise during peak times 6. IMPLICATIONS FOR IMPORTERS

Conclusion: Importers benefit from rate stability Carriers benefit from rate stability NVO’s claim to benefit from rate stability As all involved parties seem to want the same thing => How come we can never achieve it? 6. IMPLICATIONS FOR IMPORTERS

- Long term contracts with rate adjustments (Trigger, Cap, Index, Baf) - Derivatives (Added security, but risk of speculation) - Further branding initiatives by carriers. - Due the low profitability of the container business => Only the strong may survive. 7. POSSIBLE FUTURE TENDENCIES

- Slot cost competition If the market continues to grow at + 10% then bigger is better But - if growth slows or stops  Will that still be the case? - if sourcing origins spread  Will that still be the case? - if the price of oil goes down  Will that still be the case? - if the Panama Canal expansion is done  Will that still be the case? 7. POSSIBLE FUTURE TENDENCIES