Early mover or continued folly?

Early mover or continued folly?       United Arab Shipping Co. made a bit of recent history in August when it relaunched the second loop on its AEC service connecting the Far East, Middle East and Northern Europe.
      The history is that, as maritime news service Alphaliner put it, it's the first introduction of major capacity into the Far East/Europe trade since the bottom fell out of the world economy one year ago.
      There are a couple things to consider when judging this move. One is that UASC has ships and capacity it needs to deploy ' no other carrier in the world has as much capacity on order relative to the size of its current fleet than the Gulf-based carrier.
      Not only does UASC have capacity on order, it has it in the form of big vessels, ones that need to be employed on lucrative mainline hauls like Far East/Europe in order to make the economies of scale work.
      In this case, the ships are all newbuildings, to be delivered through November, on charters fixed in 2007 and 2008. That added capacity ' 38,250 TEUs worth ' represents about a quarter of UASC's total fleet. Again, that means the carrier's capacity will grow 25 percent in the second half of a year most are calling the worst in history for the industry.
      But let's leave, for a moment, the fact that UASC needs to get something out of its costly and looming assets. Is there another reason for the line to start a second loop in a trade where every major competitor has pulled supply? Where, as Alphaliner reported, 21 percent of capacity had been pulled as of the end of July? Where 20 services have been pulled?
      One could make the case that UASC is an early mover on the 'buy' phase of the stock that is the Far East/Europe trade. If the idea is to buy when prices are low and sell when they're high, perhaps the move to increase capacity by more than 60 percent from the Far East to the Middle East and Northern Europe represents a marker for the future.
      Or perhaps it represents a decision based on need rather than prudence. The carrier pulled loop one on the AEC service in January when things seemed to be at their worst. In the last six months, demand fell further and then stabilized. But it hasn't exactly rebounded. Carriers are trying to push for peak season surcharges in summer based on the notion that utilization is higher. But utilization is only higher because carriers have had to park so many vessels, not because demand has made it so.
      At this point, the reintroduction of sizable capacity into a trade that has shed nearly 100,000 TEUs of weekly supply seems to be a gamble. But it might be a gamble UASC had to make.

Zim joins big boys, but too late?
      Another carrier that bet big on big ships is Zim, the Israeli carrier that is suffering through a torrid 2008 and 2009.
      The line had a bit of good news to share in July when it unveiled the biggest ships ever to enter its fleet ' the 10,062-TEU Zim Djibouti and the 8,440-TEU Zim Los Angeles. They're the first of 12 megaships Zim ordered from 2006 to 2007.
      Both the ships will be deployed on Zim's joint service with the Grand Alliance carriers (PNX) connecting East Asia to the West Coast of North America.
      The question is, have they come in time to help or hurt Zim? The carrier has languished at the bottom of American Shipper's Who's Making Money rankings the last few years and lost huge amounts in 2008 ' a year when all but a handful of carriers either made money or broke even (July American Shipper, pages 40-51). Along with the delivery of the new ships came news in July that Zim had received $100 million of a proposed $150 million cash infusion from its parent company Israel Corp. The remaining $50 million is expected to come soon, with Zim struggling (like every other carrier) to cope with the cash side of day-to-day operations.
      And in early August, Israel Corp. said it would extend the infusion by another $350 million as the carrier wrestled with a projected cash shortfall of $1 billion, amidst reports that the line's value is near zero.
      With 10 more ships to pay for and another nine 12,500-TEU vessels to be delivered starting from 2013, Zim has a lot to finance and declining revenue from which to do it.
      But for now, let's be happy for Zim, which has finally joined the ranks of the mega-vessel owners.

Hapag-Lloyd hurting
      And now, more on another line needing a cash infusion from its owners.
      As of press time, German stalwart Hapag-Lloyd was embroiled in a bid to stave off near-term disaster. It was seeking an injection of liquidity from shareholders, which includes the TUI Group, the tourism giant that formerly owned the container line but sold off 57 percent to a consortium of Hamburg investors.

Kuehne

      Included in that consortium is Klaus-Michael Kuehne, chairman of logistics giant Kuenhe + Nagel, who was said to be balking at the manner in which the carrier has been managed.
      The latest is that shareholders themselves balked at the straight cash infusion and instead opted for a deal in which the German line has essentially sold its 25 percent stake in a state-of-the-art Hamburg container terminal to a portion of the consortium and TUI, at a price tag of about $450 million. Hapag-Lloyd bought the shareholding in the terminal for $23 million and that discrepancy is what caused Kuehne to opt out and term the deal a 'pure real estate financing plan,' according to Lloyd's List.
      Hapag-Lloyd was also said to be seeking the same deal from German ship charterers that embattled line Chilean CSAV received earlier this year ' that is, a break on long-term charters so that rates are more commensurate with current levels. It's clear the German line is hurting, a mere year after going up for sale and less than four years from its acquisition of CP Ships ' a move that took the line into the world's top five in terms of fleet capacity.
      Many questioned the wisdom, not to mention the price tag, of Hapag-Lloyd's acquisition, though it undoubtedly opened up markets for the German line, notably in the Europe/South America trade. But it's been an up-and-down ride since the acquisition, with the carrier struggling to integrate CP Ships, then rebounding to post two solid years of profits in 2007 and 2008. This year will undoubtedly not be so rosy.