Liner carriers are under enormous pressure to confront overcapacity and cleaner fuel requirements.
While there are some signs that the economy is improving in the United States and Europe, the container industry seems likely to continue facing challenges in coming years because of surplus capacity and looming requirements to use cleaner fuel.
Hong Kong-based OOCL said in the first half of this year it saw “robust growth in cargo demand in the major European and American markets.”
“Moving into 2014, there has been cargo volume increase and a generally more positive sentiment than last year,” noted C.C. Tung, chairman of OOCL’s parent company, Orient Overseas (International) Ltd., in a statement. “In total, it is expected that the container transportation industry posted improved results for the first half of 2014.”
Tung warned, however, that improvement in the container business may be “capped given the large newbuilding orderbook and the anticipated next round of newbuildings that will likely materialize over the next twelve months.”
Japan’s MOL said while container trade in the transpacific and Asia-Europe trades has been stable, “a recovery in freight rates, which have slumped due to factors including continued deliveries of large vessels, remained elusive” and rates on the trade to South America’s east coast have dropped with an economic slowdown.
Ron Widdows, a member of the advisory board of Rickmers Holdings, said during an address at Marine Money’s conference in New York in June that growth in container volumes has slowed and volatility has grown.
The industry is beginning to see the effect of cascading of ships from East-West trade routes into other markets and Widdows said that trend will continue.
As ships cascaded into Latin America trades, rates collapsed and in the buoyant intra-Asia trade is being “visited by people and assets that were not there before,” he added.
Dirk Visser of Dynamar expects an improvement in the container shipping business in 2015 and 2016 with demand outstripping supply. He projects a supply increase next year of 3.7 percent, but an increase in demand of 6.5 percent. In 2016 he forecasts demand to grow 6 percent compared with supply growth of 3 percent.
Paul Bingham, an economist with CDM Smith, said expectations of economic growth have been tempered since the beginning of this year, in part because of geopolitical events such as the wars in the Ukraine and Iraq.
Even without new orders, Bingham said it will be hard for volumes to keep pace with the “built-in momentum” already in place because of existing orders for containerships.
This year’s list of the 20 largest liner carriers contains the same shipping companies as last year, though some companies may have moved up or down in size ranking by one to three notches.
Are those changes in ranking important? Time will tell. Carriers that look expansionary may sell ships or take vessels off charter, especially if the market weakens. Ships are so large these days that adding a single string of vessels may propel a carrier’s fleet size ahead of several competitors.
Carriers do not order ships in sync—and especially today with many carriers under financial stress, they may be conserving capital, or waiting for more favorable prices at shipyards.
Beyond the plans by Hapag-Lloyd to acquire CSAV’s liner business and Hamburg Süd seeking to do the same with CCNI, it seems unlikely any of the major container carriers are going to merge or go out of business.
Those deals suggest container industry merger and acquisition activity will be “restricted to piecemeal add-ons of regional specialists rather than anything more substantial,” said Drewry in an issue of its Container Insight Weekly newsletter last month. Both CSAV and CCNI are based in Valparaiso, Chile.
Widdows said while consolidation is needed in the industry, getting there will take some time and may travel a tortured path. He noted most of the major shipping companies are controlled by families, governments, and big conglomerates. For consolidation to occur, they must be convinced that combining with another carrier will be beneficial.
Continued Growth. Alphaliner stated the capacity of the container fleet grew 5.7 percent to 17.3 million TEUs at the end of 2013.
With 17.8 million TEUs of capacity on 4,985 ships as of July 1 this year, Alphaliner forecasts the fleet will grow to 18.2 million TEUs by year’s end, or 5.6 percent growth in 2014. Next year it forecasts 8 percent growth, so the fleet will be 19.7 million TEUs by the end of 2015.
“There is no real change in the supply-demand balance in 2014 compared to last year,” said H.J. Tan, a principal at Alphaliner. “There are still too many ships and the over-supply outlook remains in 2015.”
He believes “ordering will remain focused on the larger ships. The outlook for smaller sizes remain clouded by the impact of cascading.”
Dynamar’s Visser expects “ordering to focus on broadly three different sizes: the so-called wide-body 9,000-TEU units; ships of around 14,000 TEUs, adapted in such that they will fit through the new Panama Canal; and 18,000-TEU units, of which the ordering may resume when the Far East-Europe route clearly recovers.”
As of July 1, Alphaliner said there were 489 ships with 3.6 million TEUs of capacity on order—with 41 percent of that on ships with capacity of more than 13,300 TEUs, 11 percent on ships with capacity between 10,000 TEUs and 13,300 TEUs, and 28 percent on ships with capacity from 7,500 TEUs to 9,999 TEUs.
“There are going to be a lot of ships required by this industry,” Widdows said. “Over the next five years, 10 years, an enormous number of ships.
“That has to do with better efficiency, better fuel economy. There are some events coming on down the road a little ways in terms of fuel standards that are going to drive the need for a lot of ships,” he added.
Gerry Wang, chief executive officer of the containership charterer Seaspan, noted in a recent call with analysts that “bunker costs about 30 percent to 45 percent of an operator’s operating costs, so chartering a new eco-class vessels is imperative to bringing down those costs in line with improving profitability.”
He predicted in the second half of this year “we will see firm demand for larger vessels,” partially because the shipping industry now has a clearer picture since the P3 Network—the global vessel sharing alliance proposed by Maersk, Mediterranean Shipping Co. and CMA CGM—was rejected by Chinese regulators earlier this year.
“People were wondering what would happen to P3, so there was some uncertainty there,” Wang said. With that uncertainty gone, he added “people are really pretty much into their own game in terms of fleet replacement and realignments.”
Wang said there are many discussions going on among carriers and “we expect some of those discussions will be translated into very firm requirements.”
Widdows said he was surprised by China’s rejection of the P3, but predicts carriers will continue to join together to seek economies in provisioning their fleets.
Lars Jensen, chief executive at SeaIntel, said he believes the attempt by Maersk and MSC to form the 2M, an alliance just between themselves, will succeed, although he noted that he miscalculated in his initial view that Chinese regulators would approve the P3.
Tan said he did not believe big carriers will have to avoid growth in China because of the P3 decision. “Chinese regulators do make a distinction between organic growth and growth from mergers or consolidation. It should not have an impact on carriers’ organic East-West growth ambitions,” he said.
Visser agreed, citing Maersk has been allowed to grow to a very large size. “It is more the co-operation between carriers of this magnitude which the Chinese blocked,” he added.
Meanwhile, the Chinese reaction to the proposed 2M alliance will be watched closely by the industry.
Low-Sulfur Challenge. A major challenge facing the shipping industry for the remainder of the decade will be higher fuel costs as carriers continue their switch from residual bunker fuel to distillate fuel to meet requirements for reduced sulfur emissions.
In January, the amount of sulfur that will be allowed in fuel burned in emission control areas along the coasts of North America and North Europe will drop from 1 percent to 0.1 percent.
“This is a very important issue for carriers, precisely as it has quite extensive costs and consequences,” Visser said. It would “in itself not be a problem if such costs could be passed on to the cargo, where they belong,” but this may not be possible.
“In particular in Europe, there is fear that much intra-Europe cargo will shift back from sea (ferry, feeder, coasters) to the much more polluting—truck,” he said.
When the change comes Jan. 1, Jensen believes many carriers “are going to try to see if they can introduce a specific low bunker adjustment factor specific to the ECA zone. That will be the logical way to go. Will they be able to pass that on to the shippers? That’s an open question.”
Widdows agreed, noting the industry “has not figured out how to pass along the current cost of bunker in their price, let alone what happens when you burn distillate fuel.”
Jensen said next year’s requirement for lower sulfur fuel will have less effect on deep-sea vessels, such as those traveling from Asia to North America or Asia to Europe since they spend a relatively short part of their total voyage time in an ECA.
He said the change, however, has major implications for short-sea operators in both Europe and the U.S. Jones Act trades.
“If you look at the European feeder ships that’s quite a mixture between old and new ships,” he said. “If you look at the U.S., particularly the Jones Act trade—those vessels are downright ancient to put it mildly.”
U.S. domestic carriers TOTE, Crowley and Matson have all ordered ships that can use liquefied natural gas (LNG) which will allow them to comply with clean air requirements. So has Containerships, a Finnish short-sea carrier, and the Port of Rotterdam is building LNG fueling stations.
But Jensen said it’s still an open question whether LNG is going take off as a marine fuel.
Even more important, Widdows said, will be the requirement in 2020 that carriers globally burn distillate fuel with a maximum sulfur content of 0.5 percent compared to 3.5 percent currently. “The industry is not prepared for that,” he said, adding there are shipping executives that “burn a candle every night and hope, hope, hope that 2020 becomes 2025. The economic effect is enormous.”
And he added the carrier industry could face further challenges if shipping becomes subject to a regime to reduce carbon dioxide emissions
Jensen said the 2020 requirement will clearly intensify the advantage of companies with more efficient vessels. While the requirements have been known for several years, he explained many companies have “postponed deliberations as to what to do, because they’ve been more than busy with the troubles in terms of making any kind of profits anyway.”
Jensen believes the low-sulfur requirements will drive a round of orders, not of the big ships, but feeder-size vessels that will operate in the emission control areas.
He doesn’t expect the urgency will be as immediate in the intra-Asia trades, although he said that could change. “If the Chinese decide to do something about the pollution problems, slapping an ECA-zone on Chinese coastal waters… it would all of sudden change the game quite a bit,” he said.
Finance Hurdles. “Finding new ways to finance, finding new ways to go about the investment in this sector in an industry that does not generate exciting returns is certainly a challenge,” Widdows said. “A lot of ships are going to be ordered and this oversupply situation is going to be extended for a period of time, no doubt, failing some pretty dramatic developments”
He said a desire to drive down costs is what drove the effort to create the P3—“it was not about service, speed or reliability.”
Widdows said container shipping has become all about reducing costs, but finding ways to do that will become increasingly challenging in the future.
The two main methods that a carrier can use to reduce costs today are slow steaming and deployment of larger ships.
“Here is the interesting part. If you look at the fuel per TEU on Asia-Europe it is essentially unchanged from 2006 to the present date. The skyrocketing cost of fuel has been pretty effectively offset by the super slow steaming and by the increase in vessel sizes,” Jensen said.
While ships can be modified to expand their capacity—for example, adding a mid-body or raising the bridge—it’s often more economical for the carrier to purchase new vessels to take advantage of the latest cost-savings technologies.
Rise Of Charterers. An interesting trend arising in the liner industry is the increased dependence on chartered ships. Tan noted charters account for about 48 percent of containerships operating today, and non-operating vessel owners account for 65 percent of newbuilding orders.
Ben Hanslip, an analyst at Clarksons, wrote in a column published in the company’s Shipping Intelligence Network that this is a dramatic change from two years ago when in June 2012 the charter owners’ share of capacity on order was 33.7 percent.
Containerships were once provided in large numbers by tax-incentivized “KG” investment partnerships in Germany, but Hanslip said this system collapsed after the 2008 financial crisis and “severely impacted the liquidity of traditional charter owners.”
He said “new sources of finance have emerged. Traditional charter owners are still under pressure and largely unable to engage in significant newbuilding activity.”
More chartered tonnage is being supplied now by public shipping companies. These include firms such as Seaspan, Danaos, Costamare, and Global Ship Lease, all listed on the New York Stock Exchange, and Rickmers, which is listed in Singapore. CIMC, the world’s leading manufacturer of shipping containers, has begun building and leasing containerships.
In addition, bulk shipping companies have expanded into the container business, including Diana Shipping, which established Diana Containerships, and Navios Maritime Partners, which added five containerships, plus two more, to be delivered later this year, to its fleet.
Most dramatically were reports, as this issue of American Shipper was going to press, that Scorpio Group—which has massive numbers of both tankers and dry-bulk ships on order—is entering the container business with an order of three ships and options for three more. Scorpio reportedly plans to order vessels with capacities of 19,200 TEUs each. If the reports prove true, these would be the largest containerships ever constructed.
Private equity companies are also becoming important players in the container industry, Widdows said. These include Apollo and Oaktree Capital, which both have joint ventures with Rickmers and the Carlyle Group.
However, Visser believes by and large carriers will strive to maintain mixed fleets of 50 percent owner and 50 percent leased ships, similar to what the industry has today.
This article was published in the September 2014 issue of American Shipper.