Shipping companies have money. And they use it. Hardly any other industry has benefited so much from the supply problems that have turned world trade upside down since the outbreak of the pandemic. High demand for goods – instead of services, which are more affected by the restrictions – congestion in ports and delays in deliveries have increased the freight costs of moving products between countries and continents across the oceans, and these rates are still not normalized. With the congestion, results are growing, which were a record in 2021 and remained so in the first quarter of 2022. They use this mountain of money to diversify their activities: they acquire logistics companies, buy planes and airlines and take over train stations and trucking companies.
The last bell came just two weeks ago with the arrival of CMA-CGM in the capital of Air France. The third largest shipping company in the world, based in Marseille, will own 9% of the flagship airline of French aviation and both companies will have a combined capacity of 10 cargo aircraft, to which a further 12 aircraft will be added
The case underscores a qualitative leap in the strategy of the sea giants, which aim to offer their customers alternative services to sea containers, which are highly subject to delays and cost increases due to port closures in China and queues at ports of destination — particularly in the USA—and the lack of truckers transporting the goods after unloading—even in Europe—.
The Italian-Swiss shipping company MSC is attempting a step similar to that of CMA-CGM. In partnership with German airline Lufthansa, this month it launched an offer for ITA, the company born from the ashes of ousted Alitalia, once the Italian carrier. If the acquisition goes through, both Air France and ITA would be at the helm of companies that own container ships, which until recently have limited their activities almost exclusively to the seas, a paradigm shift in world transport that speaks of its growing economic power.
Another way to achieve the same goal is also observed in the industry. The world’s largest shipping company, Denmark’s Maersk, has decided to switch from buying and organic growth and will launch its own airline, Maersk Air Cargo, with 15 Boeing aircraft and another five orders in the second half of the year. Earlier in November, the company acquired Senator International, a broker that helps customers book space on cargo planes.
Although sea transport prices have risen sharply in recent months, air transport is still more expensive but also faster. Industry sources explain that this is an advantage, for example to transport much-needed pharmaceutical products – in the case of masks during the pandemic. Diego Perdones, Maersk CEO for France, Iberia and Maghreb, explains that air and sea complement each other. “Perhaps the start of a new clothing line can travel by plane and the rest arrive by ship.”
Maersk’s logistics division now accounts for 15% of sales but is growing strongly -41% over the past year – and is expected to account for a third of total sales in the medium term. Per a video conference from the company’s headquarters in Pozuelo de Alarcón (Madrid), Perdones explains that they are increasingly trying to take over the entire supply chain from start to finish, that is, from the moment the product is loaded in a port until it gets there is the customer gets it, for which they have warehouses, rail terminals – in Spain they move about 150 freight trains a week – or delivery companies that allow them to compete directly with players they have not faced before, such as UPS or FedEx.
To understand the new strength of the shipping companies, just take a look at their accounting. CMA-CGM achieved a profit of more than 16.7 billion euros in 2021, thanks to a turnover of more than 52 billion. Maersk earned 15,796 million, its earnings peak and six times more than a year earlier, and billed more than 54,000 million. That means each of them has doubled last year’s revenue for Inditex, the world’s largest fashion company, and quintupled its profits.
A report by the consulting firm Alphaliner calculates that the 10 largest shipping companies together generated a profit of more than 100,000 million euros in 2021. Together, they’ve made more money than Apple, the world’s largest company, which posted nearly $90 billion in profit last year.
Miquel Serracanta, head of the Supply Chain master’s program at EAE Business School, attributes part of this success to a lack of competition. “Freight rates before the pandemic were very cheap. They have risen sharply because shipping companies have increased their margins and seven shipping companies are responsible for 80% of global freight rates. The concentration is high,” he emphasizes.
The logistics expert points out that companies in the sector are taking advantage to reinvest profits and diversify their activities. “Until now, the container was a commodity. Another added value consisted of additional services such as customs, land transport, insurance, custody or distribution, which the customer paid for. Against this background, shipping companies are trying to integrate these services into their portfolio in order to generate more margins,” he explains.
The trend will continue in 2022
The war in Ukraine has raised problems. The entire sector has pulled its ships out of Russia, and Maersk has switched the intercontinental train that used to transit the country to another route through Central Asia that connects ships, but port closures in China and queues in those of the US are keeping their rates very much up up, and 2022 could be even better. “From the moment there are still problems with the closure of ports due to Covid, the delays will continue,” says Perdones of Maersk.
The manager believes that European infrastructures have been working well, but when a ship is unable to collect the planned goods in Shanghai due to the fallout from the strict zero-Covid policy imposed by the Chinese government, the supply chain becomes chaotic because everything is interconnected : other ships are waiting in Algeciras or Rotterdam to collect goods brought by those from Shanghai and the delays are increasing.
According to Perdones, this is leading to a change in the way companies buy. “They are considering a long-term delivery. For many years they went to the spot market, meaning they reserved the space the same week they placed the order, whatever the price. Now many want to ensure supply and price stability, which are not as low as they were before the pandemic.” To do this, regardless of the ups and downs, they are opting for longer-term contracts and ordering more quantities in advance, which does not reduce the congestion contributes.
Another trend Perdones notes is that companies are trying to diversify their sources of supply. The restrictions in China have revealed the risk of being dependent on a single country for receiving the goods, which is why there is now talk of China+1, that is to say to remain present in the Asian giant but to produce a part in closer countries . Even if the labor is more expensive, that economic damage is much less than the potential damage that could result from a half-empty warehouse because Chinese truck drivers and dockers are restricted and unable to move goods. This process of shifting and shortening of supply chains is called deglobalization by some experts.
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