Shifting demand patterns will change the way the Top 20 liner carriers serve shippers.
By Eric Johnson
The depth of the eurozone crisis has peeled back the layers of a looming threat within the container shipping industry, one that could potentially reshape alliances and liner carrier networks in the coming decade.
Like a low tide exposing rocky outcroppings that lie just below the surface, plunging demand in Europe, and to a lesser extent North America, has hurt the world’s biggest liner carriers on their most important trades.
How deep is the threat? In figures provided to American Shipper, the consultancy Seabury said Asia-Europe container volume was down 5 percent through May this year. That would be bad enough alone, but when you compare it to projected growth of 5 percent in 2012 the numbers are downright disconcerting.
Things are marginally better in North America, still in an economic hangover from the financial meltdown that began in 2008. Volume growth was 1 percent through May, compared to a projected 5 percent growth for 2012.
There’s still time for demand to rebound in 2012, but it would be a long shot, and it doesn’t seem that carriers expect it to happen. The Grand and CKYH-Evergreen alliances announced in September they would each be shelving an Asia-Europe service by mid-October. Historically, that is early for carrier groupings to start their winter capacity rationalization plans, and quite a clear sign that demand is simply not keeping up with expectation.
The Grand Alliance, along with Zim, also announced it would cull a transpacific all-water service from Oct. 8, signaling things aren’t much better on that trade either. Eastbound transpacific capacity has risen 10.2 percent since the start of 2012, but the bulk of that increase came in the second quarter of the year. Since July 1, it has fallen 1.4 percent to 326,182 TEUs of weekly allocated capacity, according to the BlueWater Reporting service of American Shipper affiliate ComPair Data.
On the Asia-Europe trade, capacity has risen 10.5 percent since the start of 2012, though again, most of that came in the second quarter. However, carriers have added 1.6 percent of weekly allocated capacity to 357,353 TEUs since July 1.
So the service withdrawals announced thus far on both trades won’t even return capacity levels to those seen in early April, much less account for anemic demand growth on the two lanes.
Put simply, carriers are finding it difficult to find profitable, long-haul trades in which to retreat. That has severe short- and long-term impacts. Short-term, it affects their ability to generate cash flow and profits. Long-term, it affects their debt levels from two perspectives. First, a failure to glean substantial profits hurts the lines’ ability to pay down debt, requiring them to refinance loans, seek capital infusions from shareholders, or sell bonds. Second, it gradually dilutes their leverage in securing attractive financing terms for existing and future debt. Every quarter individual lines struggle, it gets harder to convince lenders that they are a good bet. And every quarter the industry as a whole struggles, even well-run lines are affected that much more.
Positive News. The positive news is that the industry has largely refrained from plunging itself deeper into the debt mire this year with more orders for ships. As of mid-September, the biggest 20 lines in the world had a collective 310 ships on order, accounting for about 2.9 million TEUs of capacity.
That’s down from 413 ships, worth 3.7 million TEUs of capacity, a year ago, or a reduction of 21.8 percent. What’s more, the order book for the top 20 carriers now represents 20.8 percent of their existing fleet. Historically, that’s a low number, one low enough to usually induce a robust round of ship ordering. It’s down from 28 percent a year ago, and as high as 47.8 percent in 2008.
Additionally, as about 809,000 TEUs of newbuild capacity was absorbed into the top 20 carriers’ fleets in the last year, those same operators’ total fleets only grew by 713,000 TEUs. In other words, total top 20 carriers’ capacity grew by 5.4 percent in the last year, but it could have been worse.
The most notable development, with regard to ship ordering, is the way the order book of CMA CGM has shrunk. The third biggest line in the world, CMA CGM has for years been near the top in terms of vessel ordering. As recently as 2008, it had more capacity on order than any other carrier in the world. In 2009 and 2010, only Maersk Line and Mediterranean Shipping Co., the two lines bigger than CMA CGM, had more capacity on order.
But since mid-September, CMA CGM has a virtually empty order book, with six ships to be delivered, representing less than 4 percent of its current fleet capacity. Again, for reference, in 2008 the French line had an equivalent 69 percent of its fleet on order. Only three of the top 20 now have less capacity on order than CMA CGM.
Now that its vessels ordered years ago have mostly been delivered, CMA CGM has abstained from ordering, perhaps focusing on paying down its $5 billion in debt. The avoidance of orders has created a gap between Maersk and MSC and the rest of the field, so that if all ordered vessels are delivered and no more are ordered, MSC would have a fleet twice the size of CMA CGM’s within a couple years.
Ten of the top 20 carriers have order books of less than 100,000 TEUs of capacity, compared to six in 2011, 10 in 2010, four in 2009, and two in 2008. (It should be noted that order books in 2010 were affected by the record losses incurred in 2009, with lines bouncing back to order fairly heavily in late 2010 and early 2011.)
The picture the order book paints is one of a very cautious industry, hesitant to sink further into the oversupply hole it created. Indeed, carriers overall have shown restraint that may well pay handsome dividends in a couple years, if demand growth ever resumes.
Beyond Europe. That, of course, is a major “if” at the moment. Europe’s troubles don’t seem easily solved, and if they aren’t, it could bring the ship-ordering strategy of the top global lines down like a house of cards.
As written countless times, the very biggest ships in operation today are designed specifically for the Asia-Europe trade, which has vast demand and deep, efficient ports.
But if that demand tapers off indefinitely, the value of the megaship fleet meant to serve that trade diminishes and, in effect, becomes a liability.
The reality is carriers are looking to other fields to solve the demand problems on their historic core trades. While Seabury’s statistics show Asia-Europe and transpacific volume is stagnant or receding, they also show heady growth on the emerging-to-emerging lanes, such as Asia-South America and Asia-Africa. The latter is particularly robust, with Asia imports to Africa up 14 percent through May and exports from Africa up 15 percent.
Asia exports to South America are up 9 percent, and imports from South America are up 15 percent. Asia-Middle East trade is up only 3 percent westbound, but 21 percent eastbound. All of that growth exists completely outside the sphere of North American and European influence.
In truth, Europe’s troubled currencies have led to sizable export growth to North America, South America, and Africa, while two-way North America-South America is also strong. But outside of those success stories, the transpacific and Asia-Europe pictures just don’t look bright.
So it’s interesting to see which lines among the top 20 are tapping into these growing sources of trade using BlueWater Reporting.
The majority of lines have dedicated between 13 and 25 percent of their deployed fleet capacity toward the trades between Asia, Africa, the Middle East, and South America. Exceptions on the low-end include Hapag-Lloyd, MSC, and Zim, which use more slot charters on other carriers’ services to bolster their market coverage. On the higher end, some of the smaller carriers in the top 20 have a greater relative exposure to these emerging-to-emerging trades because they have limited exposure on the larger Asia-Europe and transpacific lanes.
Bear in mind as well that Maersk’s 17.4 percent exposure to these trades represents more than 100,000 TEUs of deployed capacity. So even though 59.6 percent of PIL’s capacity is on these trades, Maersk deploys far more than the 30,700 TEUs that PIL does. So there’s a context to this capacity internally and externally.
Certain lines have focused on the blossoming Asia-Middle East trade, with CMA CGM and partner UASC even finding a home for megaships on a pure Asia-Middle East string. Others are stronger on the trades to South America or Africa.
And focusing on these trades leaves out the impact of intra-Asia trade, which is responsible for a heavy portion of deployed capacity for many lines, especially the Asia-headquartered carriers that rely on domestic Chinese trade and Chinese trade to and from Southeast Asia.
But for one, those severely competitive routes are high volume/low rate, meaning carriers have to work harder for less return than on longer haul routes. Second, intra-Asia trade is only growing in line with global demand — at around 4 percent through May, according to Seabury — indicating mediocre demand growth for container shipping worldwide. When intra-Asia demand growth surpasses global growth, it’s a bullish container market.
While some lines have made inroads in Africa and South America — notably Maersk and its sister company APM Terminals — none of the top global operators can truly say they are yet prepared to transition to a world economy where demand in North America and Europe is significantly diminished, and demand in emerging-to-emerging lanes is significantly increased.
And truthfully, that day is still some way off, though these days it looks more like a growing shape on the horizon than a tiny speck.
Fragmentation Hurts. The other looming phenomenon for the top 20 carriers is consolidation. It’s been seven years since a major carrier acquisition occurred, and over that time liner profitability has suffered.
Despite the fact that a relative small oligopoly of carriers dominates a global service industry, the industry is still too fragmented. Last year’s Top 20 report came out weeks before a major reshuffle on the Asia-Europe trade, with MSC and CMA CGM joining forces in an alliance, the Grand and New World alliances linking to create the G6 Alliance, and the CKYH carriers combining with Evergreen.
The effect of the reshuffling was to
reduce six large service factions into
three, which helped rein in capacity to a certain degree, as well as compete with Maersk, the largest single provider of capacity on the trade. Instead of offering competing service networks, for example, MSC and CMA CGM were collectively working to offer what they deemed the correct amount of capacity between them. Likewise was the case for the other new partnerships.
But reducing the number of network groupings didn’t eliminate the fact that 13 sales staffs still were left to sell space on services provided by the remaining groupings, not to mention those of Maersk and the unaffiliated China Shipping.
Consolidation has been held up by a number of factors largely outside the realm of actual performance — notably owner, government, and shareholder pride. But if the transpacific and Asia-Europe trades don’t pick up soon, will pride continue to offset millions of dollars in losses?
The reshaped landscape of the Asia-Europe trade hasn’t masked the fact that the current setup has been loss-making over a four-year period. On the flip side, carriers have focused intently on cutting costs and on their shareholders, and on the reality that the decisions they make are reflected in their relationships with lenders.
Lines were able to stave off bankruptcy by arguing that 2009 was a once-in-a-lifetime economic storm. The argument for heavy losses in 2011 was less clear. Three years removed from the global financial crisis, lines are facing up to the need to find profits, whether that means cutting costs or finding profitable trades, or both.
The Japanese carriers NYK and “K” Line have focused on systematically reducing their owned container fleets. “K” Line now has the second smallest owned fleet in the top 20 and has only two vessels on order. NYK has only four ships on order, while its fleet size has held steady for two years running.
CSAV is notable for its plunge to the bottom of the top 20, from ninth in 2011. The Chilean line has foregone participation on the Asia-Europe and transpacific trades, and its fleet has dwindled to around 260,000 TEUs (more than 80 percent of which is chartered), barely half of its size a year ago.
Evergreen, meanwhile, has moved in the other direction and now has more capacity on order than any other carrier but Maersk, after having no vessels on order in August 2009.
But the bulk of carriers have drawn down their future orders. Even MSC’s order book looks downright barren, with the equivalent of only 13.4 percent of existing capacity to be delivered. It was double that level two years ago.
In all, 17 of the 20 carriers have less onerous order books than they did a year ago, but 18 carriers have larger fleets than they did a year ago.
The question is, how quickly can the top 20 transition those fleets to tap into sources of new growth without strangling those trades with overcapacity? That’s likely the next frontier of competition, as more carriers begin to realize that these aren’t your father’s transpacific and Asia-Europe trades anymore.