Maersk pushes envelope again
Danish line keeps upping ante, as its order for new 18,000-TEU ships has the to potential to reshape network patterns.
By Eric Johnson
Maersk Line's newest vessels are large.
Large enough to fit 90 million pairs of shoes, with their boxes. Large enough to be 16 percent bigger than the biggest ships in operation today ' Maersk's own 15,500-TEU E-class vessels. And potentially large enough to change the way trades around the globe are served.
In late February, the Danish line confirmed a three-month rumor that it had ordered 10 18,000-TEU vessels, with an option to buy as many as 20 more. The vessels, which it has branded its Triple-E class, hypothetically provide Maersk with enormous economies of scale. The line estimates fuel usage per container would decrease 35 percent when the vessels are delivered from 2013 to 2015.
As of now, the vessels could really only be accommodated on the Asia/Europe lane. It's the only trade with enough demand and port infrastructure on both sides to make such ships viable. On the transpacific, for instance, demand is conceivably there, but the North American port infrastructure is not.
Maersk Line Chief Executive Eivind Kolding wryly noted it would take five days to unload these new 18,000-TEU vessels in Los Angles. And that's at a facility operated by Maersk sister company APM Terminals, the biggest container terminal in the Western Hemisphere.
But whether these new vessels show up anywhere outside of Asia/Europe, they could easily have the power to reshape Maersk's service network outside of that trade.
'With much lower operating costs than any other ships, Maersk is confident it will be able to fill all the slots even if demand weakens,' the International Ship Managers' Association (InterManager) wrote in a note in early March. 'Should that happen, other vessels will be removed from the trade, possibly onto alternative routes or even placed into layup if conditions suddenly become very much worse.
'But it is the cascading effect that will ensure the impact of the Triple-E class ships are felt in trade lanes around the world, and not just in the Asia/Europe corridor. As that trade lane adjusts, so larger ships are likely to be redeployed in regional or north/south trades. That is why all lines, big or small, global or local, will be affected one way or another by the arrival of 18,000-TEU ships in two years' time, and need to decide whether to rethink their own business plans.'
Indeed, to steal the line from the old E.F. Hutton ad, when Maersk orders, people listen. After it upped the ante in 2006 with its E-class vessels, other top 10 lines embarked on a massive ship ordering spree of ships 10,000 TEUs and larger. Those orders pushed the industry into a position of severe overcapacity in late 2008 and early 2009 when cargo demand receded.
Will this order have the same effect? From early indications, it's not likely.
For one, orders placed from 2006 through 2008 came on the back of sustained double-digit growth in global container trades. In other words, container lines had made money in the first half of the decade and were in a good position to fund orders. This Maersk order comes after a highly profitable 2010, but one that followed the most unprofitable year in container shipping history.
Secondly, not many lines are in a position, demand-wise, to attract enough cargo to fill 18,000-TEU ships, even on the world's largest trades.
And third, most of Maersk's rivals have shipbuilding programs well underway involving huge vessels. Mediterranean Shipping Co., it seems, has settled on 13,000- to 14,000-TEU vessels as its Asia/Europe workhorses. CMA CGM has had a few ships that size delivered in the past year, and is focused on the 10,000-13,000-TEU range.
'Financing is still an issue for all carriers and the German KG (ship financing) model is a lot more challenging now,' said Neil Dekker, editor of Drewry Shipping Consultants' Container Forecaster. 'Maersk's up-front payment for this order is a relatively small 10 percent, with heavy back-end financing on completion of the order. Quite frankly we do not see CMA CGM entering the fray again anytime soon given its huge existing order book, and it still has a huge commitment to 10,000-plus-TEU vessels for the next 18 months. MSC appears to have focused on the 13,000-TEU model and in recent months, either for its own use or via long term charters, has commitments to a further 18 9,000-TEU units. Many of these are aimed at (East Coast South America) routes with wide beam design. The inference is that MSC has focused on this size and its 13,000-TEU units, and so it is unlikely that MSC will follow suit via competing with Maersk. We do not really see any other carriers who would compete, and there is no way an independent owner would place orders without firm 10- to 12-year charters from a premier operator.'
To get a sense of where these ships might fit into Maersk's network, here's the line's operating ship breakdown on the Asia/Europe trade, as of March 8, according to American Shipper affiliate ComPair Data:
' AE1/AE10 butterfly service, 21 vessels of 7,200 to 9,200 TEUs, 16 of them are 8,950 TEUs.
' AE2, 10 vessels of 7,370 to 9,200 TEUs.
' AE3, six 6,700-TEU vessels.
' AE6/TP6, 12 9,700-TEU and two 9,000-TEU vessels.
' AE7, eight 15,500-TEU vessels and four others of 6,400 to 9,700 TEUs.
' AE8, five 13,000-TEU vessels.
' AE9, seven 8,500-TEU, one 8,700-TEU and two 6,200-TEU vessels.
' AE11, seven vessels of 8,100 and 8,400 TEUs.
' AE12, one 6,800-TEU and one 6,700-TEU vessel.
All told, that's 87 vessels, of which all but 13 are less than 10,000 TEUs. Maersk said in early March that it is going to phase in bigger ships on some of these services, but Maersk likely has scope to upgrade the vessel sizes on a few of these loops.
The line said the 18,000-TEU ships will be deployed on the Asia/Europe trade with a focus on major ports on that route. That's a necessity given the strain unloading and loading of these vessels would put on ports. Most analysts see the vessels being utilized as massive shuttles connecting transshipment ports, from where Maersk could feed regional trades using larger vessels (perhaps even those displaced by the 18,000-TEU ships themselves). Maersk said the ships would call five Chinese ports ' Shanghai, Ningbo, Xiamen, Yantian and Hong Kong.
Aiding Maersk is that it has an intra-Asia specialist carrier, its subsidiary MCC Transport, in place on the Asian end, and a similar intra-Europe specialist, Seago Line, ready to begin operations in April.
'There would be relatively few ports in Asia and North Europe that can handle these vessels, and Maersk would then need to ensure the feeder networks in Asia and Europe are up to speed,' Dekker said. 'MCC was marketed recently as the in-house arm of Maersk in intra-Asia ' rather than a third-party carrier ' and has increased its service portfolio of late to the smaller origins and destinations in Asia that would not be served by these mainline giants, like the Philippines and Indonesia.'
Business Monitor International speculated in November, when reports of the 18,000-TEU orders first surfaced, that 'potentially these vessels would operate a shuttle service between two major transshipment hubs, with smaller vessels taking on the role of feeders. This could dramatically change the container sector, with current major ports demoted or else a massive expansion and dredging strategies launched in order to cater for 18,000-TEU vessels.'
Dekker said the vessels also likely signal a slight modification in how Maersk will serve Asia/Europe.
'There is scope to make new Asia-to-North Europe slings with bigger tonnage into more multitrade loops by engaging in more transshipment to Africa and East Coast South America via a Med or North African hub such as Tangiers or Algeciras,' he said. 'This will mean that not all of the capacity injection will be for the North Europe route. A few Asia-to-Med loops, in conjunction with CMA, are relatively small (6,600-TEU ships) so there is possible scope here.
'Asia/Middle East might be another possibility for larger cascaded tonnage and the ships Maersk has on this route at present are rather small. Maersk already has a number of big ships placed in smaller trades so the cascading process is probably more difficult than for other carriers.'
For its part, Maersk said China's continuing prominence has played a major role in the ship order.
'The traditional economic growth centers are shifting around the world, from west to east and also north to south,' the line said. 'With a population of 1.3 billion people and projected gross domestic product growth nearing 10 percent in the next decade, China is the biggest player among the emerging economic powerhouses. For Maersk Line, this gradual change is reflected in the growing number of services covering Asian ports as well as the significant share of those services that connect China in particular to the rest of the world.'
Maersk said that in 1968, it had only one non-containerized service connecting Asia and Europe, consisting of 12 sailings per year and carrying about 8,000 tons of cargo. The line now carries roughly 2.8 million TEUs between the two continents annually, two-thirds of which goes to and from China.
'The Triple-E would not exist without the remarkable economic growth of China,' the line added.
Aside from the network effects of the order, there's also the fact these ships will add a significant amount of tonnage to the global fleet, especially if Maersk takes the options on the further 20 ships. As American Shipper reported in February, 30 18,000-TEU ships equals 540,000 TEUs of capacity, more than all but the top eight lines in the world have in their fleet.
MSC has slowly been inching its way toward Maersk's traditionally unassailable position as the top line in the world, but this order gives MSC and the rest of the trailing pack a new, more daunting target at which to aim.
'Since its acquisition of P&O Nedlloyd in August 2005, Maersk's market share has been gradually eroded,' maritime news service Alphaliner said in late February. 'Over the past five years, its market share has fallen from a peak of 18.3 percent following the acquisition to 14.5 percent currently.'
And there's definitely not total agreement, from other lines and among analysts, as to whether the industry can absorb so many massive ships.
'Whether it's a good idea or not we know: One, Maersk thinks growth this year is 8 percent, revised from 6 percent; two, Maersk is losing market share to MSC; three, all/most of the liners look at last year's performance to predict this year's after adjusting for things like 'the market grows 10 percent a year long term,' which they perhaps have revised down a little now; and four, Maersk is one of the liners that can order big ships,' wrote Charles de Trenck, founder of Hong Kong-based Transport Trackers, in an e-mail to American Shipper.
'I don't think the liners are reading the market per se to place orders. They are assuming a lot of things, as they worry they need to be ready three years ahead. They will be able to get away with part of this if oil goes to $100-plus per barrel, as slow steaming will stick around. But the (capital expenditure) should still show up as overspending in depreciation to some extent. Extra ships on strings. Extra equipment. Higher steel costs.'
De Trenck said in November, when the big ship order reports first surfaced, that Maersk would be at a distinct advantage in terms of depreciation over those who bought ships just before the downturn.
'The trend in economies of scale for containerships is apparently not over,' he said to American Shipper at the time. 'The issue though is that those who don't play the game of lower unit costs in main trunk lines will have trouble competing. Consider those who bought too many ships in the wrong ship category at per-TEU costs which were too high in 2006-2008. Their depreciation costs per unit will be too high for some time.
'The Maersk price is about $9,000 per TEU, which would compare with about $17,000 per TEU a few years ago for the bigger ships most bought at the peak. So about 50 percent less per slot cost,' he said.
Let's not forget, going large is not to impress other lines or financial markets. It's to lower unit costs on expensive sailings that last several weeks. In that sense, Maersk said it expects to gain significant advantages with the new ships.
'These ships have not been ordered from the context of specifically catering for projected increases in demand on the Asia/Europe route, although this is a factor,' Dekker said. 'They were ordered to lower per unit costs and to cut fuel consumption by up to 35 percent. Maersk believes it will then gain a significant competitive edge, which will force smaller operators to pull out of the core routes, leaving Maersk to Hoover up the additional volumes to fill its ships. (Maersk's) focus on schedule reliability will also be an important differentiator with its clients ' very important given the view that the industry has become commoditized.'