Ocean carriers massively throwing their chassis overboard

13 July 2016 Consultancy.uk

The container shipping industry continues to pass through turbulent seas on the back of a supply glut and decreasing demand. To offset debts and reduce costs, the industry is divesting from non-essential assets – including container chassis. The move has seen the industry’s chassis stock fall from 51% in 2009 to around 15% today. The effect on goods importers is uncertainty, as negotiating and supplying chassis becomes an issue.

The global shipping industry has found itself in turbulent waters, as a capacity supply glut meets reduced demand from a cooling global economy. The global fleet is forecast to grow 4.6% in 2016, and another 4.7% in 2017, while demand, is forecast to grow 1% to 3% globally. The result has been a decrease in revenues for the major shipping companies from $204 billion in 2011 to $173 billion today. In a bid to reduce costs, as well as lower debt, ocean carriers have been divesting from a range of assets, from terminals to chassis. 

The effects of the rapid divestment from chassis has a knock on effect for a range of stakeholders, from third party equipment companies to importers that rely on them to move their stock. In a new report from Kurt Salmon, titled ‘The Chassis Crisis: How Importers Can Stay Afloat amid Rising Transportation Costs’, the effects of the changes to the chassis market are considered, as well as various options available to importers seeking to keep costs down.

Ocean carriers rush to unload chassis

From sea to land
The effect of the divestment from ocean carriers has been relatively dramatic. In 2009, when the crisis within the industry was unfolding, ocean carriers owned around 51% of the total stock, by 2014 this had dropped to 15%. Chassis costs, as such, were traditionally baked into the wider cost of ocean freight contracts. Since then, for the small stock that remains in carriers’ hands, a “merchant haulage” model has emerged –meaning chassis costs are no longer part of the ocean contract and instead have become another expense for importers.

The result of the move from carriers is that a range of third-party equipment companies have picked up demand, resulting in a fragmented market and higher costs: the rental rates for chassis has increased by around 40% over the past five years and are projected to continue to rise – not inconceivably reaching $30 per day in the near future.

The costs, particularly for large importers – those moving 50,000 containers (~ 100K TEUs) of annual volume and an 8-to-10-day dwell time – could pay as much as $12 million to $15 million in annual chassis costs. Additionally, the current stock of chassis is ageing quickly, averaging 15 years of their 20 year lifespans, which adds additional downtime risks and higher maintenance costs.

Potential chassis options

Chassis model evaluation factorsChanging market
According to the report, the consequence for importers are relatively complex, and are dependent on how they approach the issue. While uncertainty currently reigns, a number of different options present themselves – including hybrid cases.

One option is chassis rental. This approach provides considerable flexibility, however, it comes at increasing costs (a CAGR of 5%-10%) and is dependent on availability – especially as the fleet ages further. Leasing, according to the firm’s analysis, provides relatively lower costs, balancing flexibility with cost savings and fleet reliability. It is, however, dependent on a good grasp of dwell time and volume variability, such that the dedicated fleet is properly sized for inbound volume. 

Ownership is another option, although this requires considerable initial capex, and comes with a range of costs and risks associated with ownership. This option is the least flexible and most complex.

Majority of retailers to lease in future

The consultancy surveyed 20 retailers and brands, the results highlight that shippers are divided on their current supply models, with 38% using gray pools, 37% using ocean carriers and 25% using a dedicated fleet.

The consultancy explored how retailers and brands will react to the continued changes to the chassis market. Of respondents, 13% said they were planning to buy, 31% said that they planned to rent as needed, while 56% said that they will lease – 34% directly and 22% from dray/3PL operators.

According to the firm, “This choice also reflects a lingering uncertainty – many retailers and importers are waiting on the market to stabilise and their competitors to move first. For the importers willing to make the first move, there are considerable advantages in the form of lower long-term rates.”

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