Monday, 29 September 2014 01:45
Larger ships a worry for shippers
Container lines in coming years will continue to order larger ships and switch membership in vessel sharing alliances in a desperate game of survival that will inevitably lead to further consolidation, industry analyst Lars Jensen said. “This is a dangerous game the carriers are playing,” Jensen, CEO of SeanIntel Consulting, told the South Carolina International Trade Conference.
These developments may take a decade to unfold, but the outcome will eventually be a global liner industry with six to eight large carriers dominating the major East-West trades and a handful of niche carriers serving the lower volume trade lanes, he said. Every measure that the carriers are deploying, slow steaming, operating ever larger vessels that lower the per-unit cost of carrying containers and forming and reconfiguring vessel sharing alliances is designed to slash operating costs.
Customers are experiencing collateral damage, including degraded on time vessel performance, ad-hoc ‘blank’ sailings that add uncertainly to supply chains and complex logistics resulting from cargo carried by two to as many as six carriers operating in the same alliance. The more carriers there are in an alliance, the more difficult it is for the partners to satisfy their individual needs for vessel, terminal and equipment utilisation.
The impact on customers is fewer service products to choose from and uneven landside transportation at origin and destination. When cargo volumes drop during seasonal slow periods, alliance partners cancel sailings to further reduce operating costs. Service integrity is thus degraded. A recent SeaIntel survey of 10,000 port arrivals found that three of every 10 vessels did not arrive on time and only about 50% of the containers arrived at their ultimate destination on time.
“Reliability is clearly a top priority,” Jensen said. Cargo interests must constantly update their scorecards as carriers enter alliances or attempt to form alliances that fail to receive international regulatory approval. At present, there are four major alliances, the newly announced Ocean Three or 03 Alliance of CMA CGM, China Shipping Container Lines and United Arab Shipping Co., the recently announced 2M Alliance of Maersk Line and Mediterranean Shipping Co., the longer standing CKYHE Alliance of Cosco, “K” Line, Yang Ming Line, Hanjin Shipping and Evergreen and the G6 Alliance of APL, MOL, Hyundai Merchant Marine, OOCL, NYK Line and Hapag-Lloyd.
Alliances with the newest, largest vessels have a strategic advantage because per-unit carrying costs decrease as vessel size increases, Jensen said. Carriers’ ability to lower their fuel costs is viewed as a major accomplishment. Since 2007, thanks to the flood of large, more efficient vessels, slow steaming and other measures, the fuel cost per TEU carried has not changed even though the price of bunker fuel has risen dramatically. Big vessels are, however, a double-edged sword.
Carriers must continue to order larger ships to further reduce their costs to remain competitive with rivals, some of whom may have lower costs and are thus able to better withstand rate erosion or periodic rate wars. The largest vessels in the world are currently the Maersk Triple Es, each with capacities of roughly 18,000 TEUs, that operate on the Asia-Europe trade and some predict that within three years vessels of 22,000 to 24,000 TEUs will enter that trade.
MSC to oust Maersk as top carrier
Mediterranean Shipping Co is set to overtake Maersk Line by 2016 as the world’s largest ocean container carrier in terms of deployed capacity, with a fleet totalling three million TEUs, according to industry analyst Alphaliner. The privately held Swiss-Italian carrier has embarked on an aggressive expansion which has swollen its order book to more 610,000 20-foot equivalent units.
This towers over the 182,000 TEUs order book of its Danish rival, which hasn’t ordered any vessels since it contracted for twenty 18,270 TEUs, Triple-E class ships in February and June 2011. MSC has recently been linked to an order for three 19,000 TEUs ships placed by China’s Bank of Communications Financial Leasing Co, at South Korea’s Daewoo shipyard and a maiden containership order by the Scorpio group for three 19,200 TEUs ships at rival Korean yard Samsung. These orders bring the number of MSC’s firm contract for 16,000-19,000 TEUs ships to 17 units which could increase further it if exercises options.
MSC also has committed to some 35 wide beam neo-panamax ships of 8,800-9,400 TEUs which will boost its fleet to three million TEUs by the end of 2016. Maersk currently operates a fleet of 2.78 million TEUs, or 15% of global capacity, followed by MSC with 2.5 million TEUs and 13.5% market share. Maersk’s reluctance to place fresh orders reflects its more conservative goal of tracking overall market growth, forecast at 4% to 5% annually.
The carrier says it does not expect to require extra capacity before 2017. MSC and Mearsk, which hope to launch their 2M vessel sharing alliance by the end of the year pending regulatory approvals, will have a ‘massive’ lead over their rivals in the race to deploy ultra large container vessels, according to Alphaliner. By the end of 2016, they will jointly operate around 47 vessels of 15,500-19,200 TEUs.
Over capacity, is it exaggerated?
Container freight rates will stabilise and may trend upward over the next few years despite the existing over capacity of vessel space because of the expansion of existing carrier alliances and the creation of new ones, according to Rolf Habben Jansen, CEO of Hapag-Lloyd. While Maersk Line CEO Soren Skou thinks rates will continue their long term decline, Jansen is optimistic. “There is going to be more stability because of the various alliances that are being formed,” Habben Jansen said in an interview with JOC.com. “I don’t think that there are a lot of people out there who have really been particularly good in predicting what the rates are going to do.” Hapag-Lloyd is a member of the G6 Alliance between six major carriers, which has been expanding its East-West services. EU antitrust gave Hapag-Lloyd the approval it needed for a merger with Chilean carrier CSAV with conditions attached. At current levels, Habben Jansen said rates are too low to justify investment in the big new, fuel efficient ships that carriers need to in order to cut their slot costs. Nevertheless, he thinks rates will start to improve. He pointed out that demand for vessel space is strong on a number of trade lanes as the global economy continues its recovery.
Worst congestion at Asian ports
Speaking to Containerisation International, MCC Transport Chief Executive Tim Wickmann and Chief Commercial Officer Naresh Potty said that schedule reliability was becoming increasingly difficult to maintain because of the congestion, which began around March. Potty named Manila as the worst performing port but said that Hong Kong, Shanghai, Qingdao, Incheon and Cat Lai in Ho Chi Minh City were also badly affected. Hong Kong congestion is causing particular issues for carriers, they said.
Wickmann said the problem appeared to be partly caused by the complicated nature of vessel sharing agreements, with cargo for several carriers being carried on a single ship that then needs to transfer to each of the carriers’ feeder, barge and intermodal service providers. This has greatly increased the number of inter terminal transfers.
“I have to say that I have been in this business for more than 24 years and I don’t think I have experienced anything as operationally challenging as I have over the last six months,” said Wickmann. He added that the congestion is increasing costs because vessels were having to wait for days outside terminals. “The way we have been overcoming this by omitting ports,” said Wickmann. “You start by waiting and after two or three days you wonder how you will get back on schedule.
“So you take fewer moves than you were planning in certain ports and this affects vessel utilisation or you simply omit calls.” Potty added it was difficult for short-haul carriers to speed up services to make up the lost time because the shorter transit times allowed for less flexibility than longer-haul services. “It also creates a snowball effect where you still have the containers in the port waiting collection and by omitting ports you just worsen the situation in the transhipment ports,” Potty said.
Near-shoring effects long-haul shipping
Near-shoring largely driven by cheaper fuel prices in the US is now fuelling intra-Americas trade, which is also benefitting from the Pacific Alliance free-trade bloc formed by Chile, Colombia, Mexico and Peru last year, according to one leading supply chain Executive. In a major two part interview with Lloyd’s Loading List.com to be published over the coming weeks, Nevino Rocco, Vice President of Sale and Marketing at Agility Americas, said the region was reaping the gains of near-shoring, a phenomenon boosted by the US Shale Gas revolution that has seen energy prices fall and enabled some manufacturers to open plants closer to market rather than ship products in from Asia.
“Managed properly, the availability of low-cost Shale Gas could catalyse a renaissance in US manufacturing, revitalising the chemical industry and enhancing the global competitiveness of energy intensive manufacturing sectors such as aluminium, steel, paper, glass and good,” he said. “Lower feedstock and energy costs could help US manufacturers reduce natural gas expenses by as much as $ 12 billion annually through 2025, creating one million new manufacturing jobs.
“More than 200 mostly US based companies have participated in on-shoring during the past four years, a trend in part motivated by the availability of less expensive natural gas.” The know-on effect of an improving US economy and manufacturing sector is also impacting its neighbours.
The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).