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American ShipperShipping

Bracing for the cascade

Big ships from Europe-Asia trade expected to enter the transpacific.

By Chris Dupin

   The next couple of years could see big changes in transpacific liner services, as many large containerships now trading between Asia and Europe are expected to “cascade” or be repositioned into transpacific services.
  
That change will present major across-the-board challenges:

  • To carriers, some of which have struggled financially and don’t want freight rates swamped by a flood of capacity.
  • To ports and terminals, which have to accommodate these bigger ships.
  • To shippers and non-vessel-operating common carriers, who are concerned about what affect these new ships will have not only on price, but the quality of service.

  
Container shipping overall has witnessed a huge increase in the size of ships.
  
On March 1, about 30 percent of the world’s existing containership capacity and 73 percent of the container slots on ships on order will have more than 7,500 TEUs of capacity, according to the information service Alphaliner. (That’s 4.98 million TEUs out of the existing world fleet of 16.4 million TEUs and 2.5 million TEUs out of 3.4 million TEUs on order, respectively.)
  
In just over two years — from the beginning of 2011 to March 1 of this year, the number of ships with more than 10,000 TEUs of capacity has more than doubled from 71 to 163. Another 118 are on order, and 41 are expected to be delivered this year.
  
During the same period, the number of ships with 7,500-9,999 TEUs of capacity has jumped from 264 to 334. Another 96 are on order.
  
Most of the largest ships — including Maersk Line’s new 18,000-TEU “Triple E” ships, and CMA CGM’s 16,020-TEU “Marco Polo”-class ships — are headed to the Asia-Europe trade, despite the weakness in the European economy.
  
Not only is Asia-Europe the world’s biggest container lane, but also the long sailing distances mean carriers can reap the greatest benefit from the economies of scale that their big ships offer.
  
As these ships are added, “we have seen some of the bigger ships come down to some of the West Coast services,” said Neil Dekker of the London-based research and consulting firm Drewry, and more are expected.
  
Both Dekker and Sean Strawbridge, who stepped down in mid-March as managing director of trade development and port operations at the Port of Long Beach, said liner carriers such as COSCO and Hanjin are joining Mediterranean Shipping Co. and CMA CGM in bringing bigger ships onto transpacific services to the West Coast, and APL is building new 9,200-TEU ships for the transpacific.
  
Strawbridge believes that some of the new vessels were built with the Asia-Europe trade in mind, but now with the European economy so weak, some carriers are positioning them in the Pacific. “Clearly, the cascading effect will have an impact on transpacific tonnage and it is likely that introduction of additional capacity will still surpass demand growth,” he said.
  
Because of the lower slot costs on the largest ships, Maersk is converting its TP7 service between East Asia and the U.S. East Coast from a trans-Panama Canal to a trans-Suez Canal routing, and Soren Skou, chief executive officer of Maersk, said he expects other carriers to follow. Industry-wide, he predicts 30 to 40 ships will move from Asia-Europe into Asia-U.S. East Coast routings in 2013 and 2014.
  
Both Skou and Gene Seroka, president of APL America, said with the high cost of fuel and current size restrictions at the Panama Canal, trans-Panama routings between Asia and the U.S. East Coast have become unprofitable. However, Mike White, president North America at Maersk, said when the expanded Panama Canal permits larger ships in 2015, trans-Panama routings may become attractive again for services between the U.S. East Coast and Shanghai and other North Asia ports.
  
Skou noted that in 2008 about 90 percent of East Asia-U.S. East Coast traffic was routed through the Panama Canal and he expects that share to drop to 60 percent.
  

Supply And Demand. “As I see it, I think the market is going to be relatively flat. I think there is way too much capacity in the trade, in both the Asia-Europe and Asia-USA trade,” said Stephen Aldridge, president of logistics services provider Encompass Global Logistics. “In the second half of this year, the third and fourth quarters, there’s going to be a tremendous amount of capacity that hits. That’s going to create even more of a negative swing in terms of balance in the trade.”
  
Keith Andrey, vice president of global ocean freight services for UPS, believes the transpacific outlook this year is “very similar to 2012. We see the same signs, similar economic conditions are going to drive the same result in the trade… The economy is slowly growing but it’s not going to make up for the capacity coming in.”
  
Dekker said in December Drewry forecast a 4.1 percent increase in the eastbound transpacific, but added that number could be revised downward when it’s updated in April.
  
The Journal of Commerce/PIERS Shipping Outlook for March said transpacific imports from Asia rose only 0.3 percent to 12.5 million TEUs in 2012 and were expected to grow just 2 percent in 2013. Above-average inventories at U.S. businesses, higher Social Security taxes, slow recovery in the housing and auto industries and the trend toward “near-sourcing” from Mexico are some factors expected to dampen U.S. eastbound transpacific trade.
  
Exports to Asia are expected to see a little stronger growth, albeit from a much lower base. PIERS data found westbound trade totaled 6.8 million TEUs in 2012, unchanged from 2011. Exports are expected to rise 3.7 percent in 2013 to a new record, helped in part by a competitive U.S. dollar.
  
Strawbridge said he has seen projections of 7-10 percent additional capacity in the transpacific, while demand is expected to grow a rather tepid 2-3 percent.
  
“That’s not stellar growth, but it is more attractive than Europe,” he said.
  
Maersk, for example, cited Alphaliner’s projections that demand in the Asia-Europe trade will grow 1 percent in 2013, following a 5 percent decline in 2012. Tan Hua Joo, executive consultant for Alphaliner, said most analysts in past years have erred on the high side in their predictions of what trade volumes will be.
  

Does It Matter? “It is essential to carriers’ long-term viability that new contracts include rates that are more closely aligned with current market levels,” said Brian Conrad, executive administrator of the Transpacific Stabilization Agreement.
  
Skou said between 2005 and 2011, carriers’ return on their earnings, as measured by earnings before interest and taxes divided by revenue, has averaged just 1 percent.
  
Tan of Alphaliner questioned whether supply and demand are the prime drivers of where rates are headed, saying he believes it “all boils down to carrier behavior.” For example, he noted in a presentation at the Transpacific Maritime conference in Long Beach, Calif., that spot freight rates moved sharply higher in the first half of last year despite an unfavorable supply-demand balance.
  
He explained there are generally two reasons why freight rates rise — high vessel utilization, as was the case in early 2010 when capacity became so tight that some shippers had freight rolled, or uniform lack of profitability, which he said sparked rate hikes last year. Skou, for example, said Maersk was losing $250 million per month in January and February 2011.
  
At least in hindsight, it was clear that carriers needed a substantial adjustment in freight rates in 2012, following losses in late 2011 and the first half of 2012, and Tan said there was sympathy among shippers for carriers during last year’s service contract negotiations.
  
Many shippers and carriers negotiate their contracts on the transpacific for a contracting year that runs from May 1 through April 30. As they negotiate this spring, tight capacity does not seem to be an issue.
  
Even with ships with collective capacity of 400,000 TEUs expected to be scrapped in 2013 and delivery of some ships postponed, capacity is likely to grow by 7 percent, Tan said. He noted five carriers — Maersk, MSC, Evergreen, APL, and Hamburg Süd — will each add more than 100,000 TEUs of capacity in 2013.
  
Earnings were a mixed bag. Maersk, for example, reported a fourth quarter profit, while others such as Hanjin and APL reported losses.
  
Howard Finkel, executive vice president of COSCO Container Lines America and vice president of parent company COSCO Americas, said “traditional supply and demand in 2013 doesn’t seem strongly in our favor, but I think that the carriers have learned our lesson that we can’t rely strictly on supply and demand in order for us to service the accounts in the way they want to be served.”
  
Rates “have to take an increase. If they remain flat or go the other way, there’s going to be some real challenges in offering the kind of service that’s needed,” he said.
  
Before attending the TPM conference in early March, Tan said he was still undecided as to where rates were headed in the Pacific, but having spoken to shippers, he thought they would go down. “It’s very hard to predict,” he said, adding the movement of rates will depend on what each carrier’s market share strategy is.
  
One disadvantage carriers have in the Asia-Europe trade is a lack of concentration.
  
In the transpacific, the top three carriers — Maersk, Cosco, and Hanjin — control just 26 percent of capacity and the next dozen carriers all have substantial shares. Contrast that with Asia-Europe, where Tan said Maersk, MSC, and CMA CGM control a whopping 46 percent of the capacity.
  
Andrey of UPS pointed out that a lot of carriers lost money in 2012 despite their efforts to manage capacity. “Ultimately I don’t think they are going to have enough demand to support the ships,” he said.
  

Three Levers. Skou said the industry will have to use “three levers” — scrapping, withdrawing ships from service, and slow steaming — to prevent rates from eroding to the point where 2013 becomes a money-losing year. “If the industry deploys those three levers in a wise way, then I think we can manage the inflow in capacity in coming years,” he said.
  
Skou said about half of the global containership capacity is on ships owned by carriers, while the other is controlled by charterers, such as investors like German KG companies, or shipowners in Greece and Japan. “Those companies are not able to compete with container lines when they get ships returned from charter. I think that is why you are seeing a slow but steady increase in the globally laid-up fleet. It’s the tonnage suppliers laying up ships,” he said, estimating that about 6 percent of the global fleet has been withdrawn.
  
The Mearsk CEO expressed concern about speculative shipbuilding, and Tan added “speculative orders, defined as ships ordered by non-operating owners with no charter arranged, still account for 10 percent of the orders placed after the Lehman crisis. This compares with 20-30 percent of orders during the pre-crisis period.”
  
Tan said “non-operating owners’ share of the idle fleet which peaked at 85 percent in September 2012 has dropped to 62 percent in February 2013 as carriers continue to struggle to deploy their own surplus capacity during the slack season.
  
“Carriers have not curbed their appetite for new capacity. The emergence of new charter owners from Greece and China, together with traditional non-operating owners, such as Zodiac and Seaspan, continue to feed the new tonnage needs of carriers who are unable to fund newbuildings on their own account. This is evidenced from the recent deals involving CMA CGM, Evergreen, Hanjin Shipping, MOL and Yang Ming,” he said.
  
Drewry’s Dekker thought, however, relatively few large ships will go into layup, since most carriers now have a strategy of deploying large ships across all trade lanes, not just the largest East-West trades, to reduce slot costs. “I don’t see a large number of 8,000-TEU ships being laid up for any significant period of time. That is not what recent trends have pointed towards,” he said.
  
Skou complimented the industry for doing a good job of managing short-term changes in demand, noting carriers cancelled 31 sailings between Asia and the United States due to reduced cargo volumes because of the seasonal slowdown around Chinese New Year. “It is a really important and quite sensible strategy by the industry because it allows us to save costs, because we are not sailing half-empty ships, we are filling up some ships and not using others and saving the fuel cost,” he said.
  
Skou noted shipping rates go up during the peak season, but fall during the slack season, but those lower rates do not attract additional cargo. “We do not create any new demand by lowering prices. We are just making the cake smaller,” he said.
  
Aldridge of Encompass Global recalled in 2010 that carriers pulled capacity to control price, and now predicted “they are going to have to do that again. If they don’t, you’ll see downward spiraling in rates.” He believes carriers are “getting away from buying market share.”
  
Finkel said some carriers who are already slow-steaming ships will look at even further speed reductions to reduce capacity and lower costs.
  
There is “definitely room to absorb additional capacity in the transpac,” Dekker said. “A couple carriers, I don’t know why, have been a little more reluctant to go down the slow-steaming routes compared to their peers.”
  
Aldridge warned as bigger ships come into the market, some carriers may be forced to either feeder more cargo into those ships or extend loops to other ports.
  
APL’s Seroka said carriers are expanding alliances—the New World and Grand alliances joined together to form the G6 Alliance in the Asia-Europe trade and this spring extended that to the East Asia-to-U.S. East Coast trade.
  
Will the G6 be expanded to the U.S. West Coast? Some carrier executives say it would be more complex because of the terminals that many carriers control in the major West Coast ports.
  
There may be actual combination of carriers, perhaps among Chinese and Japanese liners, Aldridge said. However, Tan doesn’t believe that will happen, noting volatility in the market may actually lead to some shipping lines going out of business. “I don’t think the success that the carriers had last year will be repeated,” he said.
  
“Some of the rates that are in the market today are at levels that are twice what they were a year ago,” Tan said. “What I think you’ll see this time around are several attempts to impose significant GRIs and you will see multiple failures as well of companies.”
  

Sustaining Service. Shippers are concerned that the use of these increasingly larger ships could cause deterioration in service.
  
Speaking at TPM in March, Richard Smith, vice president of global transportation for Sears Holding, said unless there are dramatic increases in cargo volumes, ships may have to add ports that would result in longer transit times. He’s also concerned the bigger ships could spend more time in port discharging or offloading their cargoes.
  
Strawbridge said ports are investing heavily so they can efficiently handle larger ships, pointing to the highly automated facility that OOCL is building in Long Beach’s middle harbor.
  
If that doesn’t happen, “whatever savings are derived from the larger vessels and the slow steaming could be reduced or even erased if they are sitting in port with tepid productivity,” he warned.
  
He noted vessel productivity on the West Coast averages around 27-29 gross container moves per hour. “That is not going to get it done. We need to be in the high 30s or low 40s in order for these ships to really be effective. That’s a tall order,” he said.
  
Strawbridge said the Port of Long Beach would like to see more consistency in productivity. “Right now, unfortunately, we have a wide gap between the leaders and the laggards, and that needs to be compressed,” he said.
  
Productivity can be improved by putting more cranes to ships, and using automatic-guided vehicles.
  
Seroka said his liner company has begun investing in its terminals, acquiring new cranes so ships can be worked more intensively, raising cranes so they can work larger ships, and extending the back reach of container cranes in Los Angeles, for example, so that two additional lanes of trucks can be worked as containers are loaded and discharged.
  
Smith of Sears expressed concern that if carriers combine into bigger alliances, the shipper may lose leverage with individual carriers.
  
He also said equipment issues could become more complex as different carriers riding on the same vessel may have different rules about where chassis and containers must to be returned.
  
These concerns may make room for regional players to offer services, Aldridge said. As an example, he pointed to Matson’s transpacific service, which is the eastbound leg of its service to Hawaii and Guam. He said keys to this service’s success include a fast transit time because it only calls a limited number of ports — Xiamen, Ningbo and Shanghai in China and Long Beach, as well as the fact that inbound containers are taken to an off-dock facility in Long Beach which provides faster truck turn times and container pickups.

Chris Dupin

Chris Dupin has written about trade and transportation and other business subjects for a variety of publications before joining American Shipper and Freightwaves.

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