Liner carriers and their alliances grapple with the largest containerships.
By Chris Dupin
The container shipping industry has shown steady drive toward bigger ships over the past five decades.
That trend, if anything, has accelerated in recent years, culminating in the past year with the delivery of CMA CGM’s three 16,022-TEU “Explorer class” ships; this summer’s arrival of the Maersk Mc-Kinney Møller and Majestic Maersk, the first two of 20 18,270-TEU ships being built for Maersk Line by Daewoo Shipbuilding and Marine Engineering (DSME); and China Shipping Container Line’s order for five even larger ships from Hyundai Heavy Industries, each capable of carrying 18,400 TEUs.
“New orders will continue apace, with orders for larger sizes expected to predominate,” said H.J. Tan, executive consultant for Alphaliner.
His firm reported in its weekly newsletter that the number of slots on the world containership fleet nudged above 17 million TEUs in August.
According to data from Clarkson and Bluewater Reporting, at the end of July, 74 percent of the TEU slots on containerships being delivered this year will be on those larger than 4,800 TEUs, roughly the largest size that can fit through the existing Panama Canal locks, as will be 94 percent of those slots next year. About 32 percent of the slots on ships delivered this year will be on those of 10,000 TEUs or larger and 57 percent will be next year.
Operating larger ships and running them at slower speeds are two of the best ways for carriers to reduce their per slot cost for moving containers.
Germanischer Lloyd estimates if bunker fuel costs are $750 per ton and a vessel travels at 19 knots, the cost per 1,000 container (that is, TEU) miles on an average existing 4,500-TEU ship will be $75, but $42 on an average existing 13,100-TEU to 14,000-TEU ship.
With new designs those costs can be brought down considerably and the chasm in operating cost between the different ship sizes narrowed. But the big ships still have a compelling cost advantage: GL figures the average cost per 1,000 container miles (again, operating at 19 knots) is $40 for new 4,500-TEU ships with “eco designs,” but just $29 per 1,000 container miles on eco ships with capacities of 13,100 to 14,000 TEUs.
Despite the big savings new designs can bring to operators of all size ships, “I do not see significant demand in the midsized segment. There is more interest in the 1,000-2,000 TEU sector than the 3,000-5,000 TEU segment,” Tan said.
As of Aug. 1, Alphaliner figures show a third of new containerships ordered for this year had capacities of 10,000 or more TEUs and 49 percent in 2014. Twenty-nine percent of the ships on order for delivery this year were in the 7,500- to 9,999-TEU range and 31 percent of those for delivery in 2014.
Jim Graf, vice president of business planning and analysis at the American Bureau of Shipping, said the economies big ships can realize depends on “how consistently can they operate when they are near full, because that is when they are most efficient and that’s in both directions. Container shipping is pretty much all about balancing available supply with the volume growth.”
He noted there are many other operational factors that influence the economic viability of big ships, such as port drafts, height restrictions, loading and unloading facilities in ports, including whether cranes have enough outreach. Ports also need adequate infrastructure to move large quantities of boxes in and out of their facilities.
Maersk, for example, has said initially it will not fully fill its Triple-E ships, each with a capacity of 18,270 TEUs, but instead load them to 14,200 TEUs, noting not all ports are ready to handle a fully loaded Triple-Es this year.
Neil Dekker, head of container research at the London-based consultants Drewry, said by their very nature there will be a relatively limited number of ports that the big 16,000- and 18,000-TEU ships will be able to call. He expects once the services get established they will probably make four major calls in Asia and something similar in North Europe. But he also said there are new ports being developed that will provide options for these large ships, including DP World’s London Gateway terminal on the Thames and Wilhelmshaven in Germany, a joint venture of Eurogate and APM Terminals.
The amount of capacity being added to the world fleet in considerable: 6.5 percent this year, 7.4 percent in 2014, and 5.4 percent by 2015, according to summary posted by Alphaliner on its Website Aug. 1.
Graf said “this year there’s been quite a bit or ordering and it’s more than we expected. I suspect it will slow down in the second half.
“I think next year, if the global economic climate improves, that you’ll see an uptick in orders and that will continue on in the future,” he added.
Marcus Ihms, ship-type expert for container vessels at Germanischer Lloyd, said with a slowdown in containership orders several years ago, shipyards became more open to new kinds of designs.
“Six or seven years ago it would be almost impossible to get a Korean yard to change their standard design. They would simply say: ‘No, that is too much effort for us and we have 10 more candidates that are very keen on new building.’ Nowadays, it’s different, even for the Korean shipyards. It’s almost like they are fighting for each of the new buildings and they have to do a lot of compromises and they have to do a lot of engineering and research,” Ihms said.
He also noted Chinese yards are beginning to build larger size containerships.
Slower Growth. The growth in ship capacity comes in the face of a tepid expansion in trade.
“The mid- to long-term view of demand on the east-west trades is certainly a lot less than what it was,” Dekker said. “I think everyone really accepts that now, including the lines.”
On the Asia-Europe and transpacific trade lanes “we won’t be looking at 10 to 12 percent trade growth — it’s more likely 3 or 4 percent,” he said. “We had a couple of poor years on Asia-Europe and transpacific already, and this year certainly isn’t expected to be a particularly good year on the head haul side there.”
In August, the International Chamber of Commerce and Munich-based economic research institute Ifo said its quarter survey of 1,000 economists in 123 countries found a decline in both the current global economic situation and the six-month economic outlook. There was declining optimism in Asia and Latin America, while economists were more optimistic about North America and Europe.
“It’s probably fair to say that outsourcing, such as it was from 2001 onwards, seems as if that has now run its course,” Dekker said.
In Asia, he said there’s some relocation of manufacturing from South China to Central and Northern China, as well as other countries such as Indonesia, Cambodia and the Philippines, but he believes “there’s certainly not going to be a wholesale change.”
Dekker said there’s anecdotal evidence of manufacturing returning to Eastern Europe and Mexico from Asia, but the carriers and shippers Drewry has interviewed “are not of the opinion that there will be a wholesale change in sourcing.”
“The North America economy has recovered from the recession, but again the growth prospects are not that fantastic,” said Jean-Paul Rodrigue, a professor at Hofstra University and author of The Geography of Transport Systems.
“Now you have the reemergence of the NAFTA trade in some ways. The growth in Mexico, the growth in Latin America, is changing trade lanes,” he said.
“Transpacific used to be the name of the game, but now since what is happening in Mexico, Colombia, Panama and to some extent Brazil and Argentina — although this is more subject to debate because Brazil and Argentina have their own problems — it is changing the orientation of trade.
“So all those big ships are coming in an environment, which is very uncertain,” Rodrigue said.
“The shipping industry was very lucky in the last two or three decades or so because the amount of cargo was increasing and the amount of miles was increasing at the same time, so everybody was happy,” he explained. “Now tonnage is problematic and the distance is somewhat being reassessed. There might be more trade than before, but if the average distance of that trade starts to shrink… if there is more tons, but less kilometers — there is less transportation taking place.”
Alliances are being formed and enlarged so that shipping companies can offer more frequency of service than they could if they went it alone, Rodrigue said, but added, “it is a marriage of convenience in some ways… those who are not part of this, there are going to be other competitors, it is going to be tough.”
“It is still clear to me that there is overcapacity rampant in the system, which on the one hand may drive further obsolescence of what may have been quite viable ships until recently, and on the other hand, will continue due to schemes out in the market,” said Charles de Trenck, a Hong Kong-based analyst. “Some of these schemes can make sense. Others may be excuses to access new financing for a range of reasons which include paying for earlier over-priced ships. This may be a difficult concept to grasp… a run rate of past over-ordering leads to more over-ordering is the point taken to its extreme.”
“There is over-supply across all trade lanes in 2013, with freight rate weakness witnessed in all main sectors,” Tan said. “Although carriers have removed capacity from the Asia-Europe sector, the surplus capacity has cascaded across all other trade lanes.”
There has been a pickup in the amount of containership capacity being taken out of the market through scraping or conversion of these vessels for other purposes. Alphaliner estimates this activity will amount to 450,000 TEUs this year, up from about 350,000 TEUs in 2012.
Tan said “scrapping has peaked in the first half of 2013, with scrapping levels in the second half expected to fall.”
Alphaliner projected scraping will drop to 275,000 TEUs in 2014 in the Aug. 1 Cellular Fleet Forecast posted on its Website.
Graf of ABS said traditionally the age at which containerships were scrapped was around 27 years, but could fall to 20 or even 18 years “because the pace of technological change and efficiency will make them obsolete sooner. In the past it wasn’t the technology as much as the structure, the steel and so forth” that resulted in the decision to demolish a ship.
Merge, No. Ally, Yes. While the ships get bigger, there has been relatively little activity on the merger and acquisition front among the largest container shipping companies.
While the German liner companies Hapag-Lloyd and Hamburg Süd held discussions about a possible combination this past winter, they failed to come to terms.
Drewry’s Dekker said while there has been a lot of talk about mergers in the past half dozen years, if anything was going to happen it probably would have happened during 2009 when the industry was in a deep recession. But he also said liner carriers may have been reluctant to take on all the problems of integrating companies during such a challenging time.
Dekker believes “if there is going to be any, if you like, getting together of big lines it would be at the operational level rather than a pure M&A-type decision.”
This year’s list of the 20 largest container carriers is quite similar to one printed in American Shipper a decade ago. P&O Nedlloyd and CP Ships, which are no longer on the list having been acquired by Maersk and Hapag-Lloyd respectively in 2005; and Pacific International Line and United Arab Shipping Corp. have advanced into the Top 20.
While mergers of carriers have stalled, cooperation in the form of alliances continues.
A big story this year in the container trade has been the announcement by Maersk, Mediterranean Shipping Co., and CMA CGM — the world’s three largest container carriers — that they plan to form an alliance called “P3” on the main east-west trades between Europe and Asia, and in the transpacific and transatlantic.
Lars Jensen, chief executive officer of SeaIntel Maritime Analysis in Copenhagen, said P3 will have more of an impact on the Asia-Europe and transatlantic trades than in the transpacific where the three carriers have been cooperating for a number of years.
He said P3 may have a big impact in the trade between the Mediterranean and North America’s east coast where “there is also a case to be made for vessels to be upsized quite significantly.”
The P3 members said they want to start the alliance in the second quarter of 2014, and Jensen thinks there’s a good chance it will pass muster with regulators.
“I don’t think the three carriers would have gone public and started to do the next round of work, which is a lot of work for them, without having extensively consulted with the authorities beforehand,” he said. He believes authorities will have outlined very clearly their concerns and what can be done to mitigate them.
“More interesting is also how this is going to affect the other two main alliances and the individual niche players,” Jensen said.
“Going forward, first of all, there will be no room for smaller niche players on the Asia-Europe trade for sure. The entry barrier is now so high in terms of vessel size and number of services that it is highly unlikely that you will see new niche players in the Asia-Europe trade. It’s just not possible,” he explained.
Dekker agrees the industry is seeing a sea change. “You go back 10 years and Maersk, MSC, CMA CGM, Evergreen — they were all quite fiercely independent carriers. That scenario now is gone,” he said.
“There will be a response to the P3, in terms of wider inter-alliance and intra-alliance cooperation,” Tan predicted.
Carrier executives say that could come in the form of the G6 expanding into the transpacific trade between the U.S. West Coast and Asia, much as it did earlier this year with trans-Suez services between Asia and the U.S. East Coast.
Other carrier executives have said in the past that putting the G6 in place on the West Coast might be difficult because so many lines have their own terminals.
But some carrier executives think that obstacle may be overblown—they point out members of the two smaller alliances now in the transpacific that make up the G6, namely the Grand Alliance and New World Alliance — as well as the “Green” or CKYH Alliance, are successfully using multiple terminals.
Consolidation of terminals in Oakland, Calif., where both Ports America and SSA Marine have large areas under their control, could be a sign of what’s to come.
“You have most of the carriers now tied up in one of the three alliances — G6, P3 and the CKYH — and the question is: What about the remaining few carriers in Asia-Europe which are not formally part of any of those alliances?” Jensen said.
“If you look at it, you are seeing Evergreen being more and more aligned together with CKYH, so that seems to be the direction they’re going in,” he added. “Then you have the constellation of United Arab Shipping Co. (UASC) and China Shipping Container Lines (CSCL) — they are working closely together. Interestingly, they would probably be an interesting catch for both the G6 and CKYH.”
The new ships ordered in recent months by UASC and CSCL “would fit very nicely into one of the two other alliances if they are to stack up long term against the P3,” Jensen said.
Another unaffiliated carrier is Zim, and Jensen noted it has “a fairly difficult choice. Because either they have to go much more all out on big ships and join that club, or they have to go the other direction.” The Israeli carrier could, he said, attempt to cancel ship orders or sell them to another company and become “more of a local niche carrier primarily for the Mediterranean — the Mediterranean to the Americas, and to the extent they want to be on Asia-Europe may rely on just swap purchases with the bigger guys.”
Upping The Ante. One interesting question, Jensen said, is what will it take longer term to be a member of those alliances? “Right now not all alliance members are contributing the same in terms of portfolios of very large vessels for the Asia-Europe trade,” he said.
He wonders if at some point carriers who are contributing a larger share of super post-Panamax ships will look to smaller members “to increase their order books, to also join in with some bigger vessels.” Otherwise, he said alliance members might question why “smaller carriers with relatively small amounts of super post-Panamax tonnage are granted access to the bigger guys’ lower slot costs. I’m not saying this will necessarily happen, but it could potentially be a trigger point to destabilize or at least reorganize the two other alliances.”
An important decision for alliances is how to structure their networks and whether to call nearby ports where individual members may have strengths. Comparing Maersk’s Asia-Europe network with that of the G6 and CKYH, for example, Jensen said SeaIntel found the alliances with multiple carriers are not completely optimized in terms of unit costs because of the desire by individual partners to “maintain their commercial focus with their different client bases.”
P3 could design a network for optimal lowest cost, but that will require the three carriers to adjust what ports they call at, including transshipment hubs that link the east-west routes of P3 with their members north-south routes to East and West Africa, South America and other points.
“In my book, P3 should be all about getting the lowest unit cost. And that would definitely mean also going not for double-dipping on hubs, but selecting a few centralized hubs that serve all three carriers at the same time,” Jensen said. “If they do that then that will almost by definition put added pressure on both G6 and CKYH to get their hubs a bit more streamlined and also get reduce the number of hubs that they are using.”
Charter Or Buy? In August, Drewry said it expects the proportion of containerships and boxes that are leased by liner companies to grow in the coming years.
“As ocean carriers’ financial results are not expected to improve significantly before 2016, leasing will continue to grow, thereby creating opportunities for new financiers to enter the market. Although still some way away, the pool of large containerships available for charter will grow, with a wide variety of possible consequences,” Drewry said.
That observation mirrored remarks by Gerry Wang, chief executive officer the containership chartering company Seaspan Corp., who predicted this summer liner companies may “make ship outsourcing a larger part of fleet modernization programs,” because their balance sheets are not as strong as they would like them.
Seaspan is building 15 containerships with capacities of 14,000 TEUs each that will be leased to Yang Ming.
In July, China International Marine Containers Group, part of the COSCO group, announced it signed a contract for $595 million to build seven 8,800-TEU ships to be leased to FMC.
Chartering “can make sense because of situations such as CIMC are partly there to backstop some China shipyards while accessing cheap capital for certain privileged carriers (two birds one stone), and due to a regular occurrence of chartering to balance ship purchases, again with new players taking over from some of the legacy European owners,” de Trenck said.
Tan said a “carrier’s decision to own or charter tonnage depends on their relative cost of capital and would vary from one carrier to another.”
Drewry said its records at the beginning of July showed just over 64 percent of all vessel capacity ordered since the middle of 2011 has been placed by chartering companies, not liner companies, building on a trend that started as far back as 2004 when the proportion of the top 20 carriers’ chartered fleet reached 48 percent.